Jesse Livermore: The Greatest Trader Who Ever Lived
- Posted by Eddy Elfenbein on November 5th, 2013 at 9:03 am
When Jesse Livermore made his first stock trade at the tender age of 15, he didn’t hedge his bets. He consulted the charts he’d compiled working as a chalkboard runner in a Boston brokerage firm, and when the figures for the company in question, Burlington, checked out, he went all in, investing everything he had—all $5—in the railroad. Two days later, he cashed in his shares, for a profit of $3.12.
It was 1892.
Exhilarating, that first taste. The pendulum had begun to swing.
Livermore began to roam the streets of Beantown, frequenting its bucket shops, gambling counters that took bets on stocks without executing actual trades. His ability to recognize patterns in the ticker tape stood him in good stead. In six months, he’d accumulated $1,000. Five years later, it was $10,000—enough to make him persona non grata to every pseudo-broker in the city.
So he moved to New York and graduated to trading with real Wall Street firms. Something, however, was wrong. His system wasn’t delivering as expected. He watched his stake drop, first to $2,500, then to zero. At an age when most contemporary youth were still preoccupied with fraternity smokers and petting, the “Boy Plunger” (turn-of-the-century slang for “reckless gambler”) had already gone through a full cycle of boom and bust.
Livermore decided the problem lay in the lag time between the stock order and the execution of the purchase itself. So he borrowed $500 against future gains. The pendulum began to swing wider. Quickly making back what he’d lost, he increased his stash further, to $50,000. Then, on May 9, 1901, he lost it all, every penny, largely due to the frenzied pace of the day’s trading.
Again he hit the bucket shops, again accumulating a stake that allowed him to get back into the game. He returned to New York with what he termed a “fair-sized roll.” Then, on April 16, 1906, he was hit by a premonition. With no warning, he yielded to a strange urge to sell short a thousand shares of Union Pacific railroad—an urge even he admitted he didn’t understand. Two days later, the San Francisco Earthquake hit. Union Pacific was decimated; he’d made $250,000 literally overnight. Inexplicable, the sudden intuition, but just as inexplicable was what happened next: again trading in shares of Union Pacific, he violated two of his most cherished principles—never heed insider information, and always keep your own counsel—and sold short when a friend tipped him off that the stock was about to tank. It didn’t. His net loss: more than $40,000.
The arcs described by the pendulum continued to widen, the swings to grow ever more vertiginous. During the Panic of 1907, Livermore again shorted the market, earning $1 million in the course of a few days. He then proceeded to lose everything in an attempt to corner the cotton sector, declaring bankruptcy and running up debts of over $1 million by 1916. Once again, he amassed sufficient capital to recover, making first $3 million (in assorted commodities), then $10 million (in wheat). Then came his greatest moment: sensing the impending 1929 crash, he again shorted the market, emerging from the rubble of October 29 with a net profit of $100 million—well over a billion dollars in today’s money.
Five years later, he was bankrupt, his vast fortune completely wiped out, for reasons that remain mysterious even today.
Livermore rallied from his subsequent depression in the late 30s, pooling sufficient energy to write a book detailing his trading principles. But on November 20, 1940, the pendulum swung finally, irrevocably against him. In the cloakroom of the Sherry Netherland Hotel in Midtown Manhattan, he shot himself in the head with a .32 Colt automatic. A suicide note was found scribbled in his notebook: “I am a failure,” it said.
Who was Jesse Livermore? How could the world’s greatest trader, the author of one of the most staggering fortunes America had ever seen, end up hitting the wall in just five years? What drove him to take ever more manic risks with his trades, to the point where the harmonic oscillator of his own speculations ended by ripping him apart?
Livermore himself gives us a clue to his own mystery in Reminiscences of a Stock Operator, the book of interviews he wrote with the journalist Edwin Lefèvre:
The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear….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….It is absolutely wrong to gamble in stocks the way the average man does.
The great trader liked to style himself as a dispassionate analyst. Repeatedly in Reminiscences, we find him stepping back from the welter of the trading floor to admonish himself with conclusions drawn from his market smash-ups—conclusions that read like oracular utterances brought down from the sacred mount of traders: “I learned you must give up trying to catch the last eighth, or the first: these two are the most expensive eighths in the world,” and the like. But the excerpt above intimates that perhaps cold-blooded calculation wasn’t the whole story. That beneath the rational exterior lay something that was not rational, that had to do instead with dreams and forebodings and hidden compulsions. That this aloof, seemingly imperturbable man was in fact deeply attuned to the obscure rumblings of chaos.
For chaotic his life was, in spades. His broker, reflecting on his penchant for cruising the Manhattan streets at night in his canary-yellow Rolls Royce in search of young girls, quipped, “When Livermore is speculating, he is thinking of screwing, and when he is screwing he is thinking of speculating.” His first wife, Nettie Jordan, separated from him one year after their wedding, following a tearful scene in which he begged her to pawn her jewels to finance one of his bankruptcies. His second wife, Dorothy Wendt, was an 18-year-old Ziegfield Follies showgirl who responded to Livermore’s philandering by taking up with a Prohibition agent; after separating from both men, she went on to shoot her 16-year-old son, Jesse, Jr., through the chest with a .22-caliber rifle. Both Livermore’s son and his grandson were manic-depressive and suffered from alcoholism. Both committed suicide.
Nor was chaos a mere by-product of Livermore’s personal eccentricities—it was his stock in trade. The Great Bear of Wall Street made his greatest profits when he sold short, that is to say, when he capitalized on other traders’ helplessness in the face of their own hopes and fears. In an age when Wall Street optimism was almost an American religion, he learned to read, and profit by, the dark anxieties that flowed just beneath the surface of the zeitgeist and that were liable to break out at any moment. He was an expert at sensing the nature and scope of mass hysteria, the thresholds at which men begin to panic. It’s no accident, then, that his favorite book was Extraordinary Popular Delusions and the Madness of Crowds, the Scottish philosopher Charles Mackay’s dark treatise on the power of the irrational in history. Nor is it an accident that, in seeking to harness the forces of unreason that he knew so intimately, he ended up betrayed by them—betrayed and, ultimately, destroyed.
The man who all his life sought to codify the workings of the market into a foolproof set of rules was the same man who consistently violated those rules, helpless to resist his own compulsions. The man who proclaimed clear-sighted analysis as the key to the charts was also a man haunted by irrational dreams and forebodings, who depended upon an uncanny sixth sense to tell him which way the market was moving, and who ultimately succumbed to the same delusions he fought so hard to keep at bay.
Traders are not the same as investors. Investors, however aggressive, are devotees of the long term. Personality-wise they tend to be more sober, more thoughtful and restrained, a la Warren Buffett or Peter Lynch. Volatility is, if not their enemy, then at best an unpredictable confederate, to be regarded with suspicion. Traders, by contrast, live in the moment. They operate by learning to feel the market, sensing when to cut their losses, when to double down, when to follow the trend and when to go against everyone. Far from being adverse to volatility, they secretly hope to get inside it, to understand it and so ride it to victory.
Like all traders, Livermore dreamed of beating the market, pinning his hopes to the forces of order: reason, logic, calculation, monetary self-discipline. Yet like all traders, he ultimately came face to face with that which cannot be rationalized, not just in the great hurly-burly of Wall Street but inside himself, in the shadowy realm where desire becomes compulsion and ambition self-destructive obsession. So that in the end, his battle with the market was a stand-in for his larger battle with himself.
Livermore was well aware of the chaos inside him. That’s why, early in his career, he invested in $800,000 worth of annuities for his wife and children that he himself would be unable to touch: “I knew a trading man will spend anything he can lay his hands on. By doing what I did my wife and child are safe from me.”
In the end, Livermore’s dream was the great, illusory dream of gamblers everywhere: to impose form and coherence on chance itself. But he failed to treat chance with the proper respect: he got too close. His story reads like a dark pendant to that other great 1920s story of lives lost to the pursuit of wealth, The Great Gatsby. Like Fitzgerald’s hero, Livermore sought to define himself against the huge forces that were shaping an America on the verge of empire. His failure, no less than Gatsby’s, is a grim parable of the fate of the individual in the age of money.
(You can sign up for my free investing newsletter here.)
-
DirecTV Earns $1.28 Per Share
Posted by Eddy Elfenbein on November 5th, 2013 at 8:00 amDirecTV ($DTV) just reported Q3 earnings of $1.28 per share, which was 26 cents more than consensus. In the U.S., DirecTV added 139,00 subscribers which doubled expectations. This is happening at the same time that Time Warner and Comcast are hemorrhaging subs.
“DirecTV didn’t give customers any reason to cancel in terms of blackouts or anything like that,” said Brean Capital analyst Todd Mitchell. “DirecTV has been good at picking up customers after blackouts.”
Shares of DirecTV rose 2.5 percent to $66 in trading before the market opened.
ISI analyst Vijay Jayant said the low churn could be because of the company’s exclusive National Football League Sunday Ticket package, which lets DirecTV customers watch out-of-market games every Sunday. Promotion for that product ramped up in the third quarter.
Net income attributable to DirecTV was $699 million, or $1.28 per share, compared with $565 million, or 90 cents share, a year earlier.
Excluding a fee settlement and other special items, earnings came to $1.13 per share, which beat the analysts’ average estimate by 12 cents, according to Thomson Reuters I/B/E/S.
Revenue rose 6 percent to $7.88 billion, narrowly exceeding analysts’ estimates of $7.84 billion.
In Latin America, DirecTV added 260,000 subscribers, while StreetAccount was looking for 371,900.
-
Cognizant Beats and Raises Guidance
Posted by Eddy Elfenbein on November 5th, 2013 at 7:29 amNice quarter for Cognizant Technology Solutions ($CTSH). The company earned $1.13 per share which was three cents more than expectations. Quarterly revenues rose 21.9% to $2.31 billion, $50 million more than consensus.
Best of all, CTSH raised full-year guidance from $4.32 to $4.37 per share. Full-year revenue is expected to be at least $8.84 billion, which is an increase of 20.3% over last year.
“We delivered yet another quarter of industry-leading growth that was broad-based across our portfolio of industries, services and geographies,” said Francisco D’Souza, Chief Executive Officer. “The sheer velocity of change in the industries we serve is driving the C-suite to challenge the status quo and rethink their business models to be relevant for the future. Our investments across multiple horizons of growth position us well to deliver differentiated value as we partner with clients in this journey.”
“Our performance during the quarter was stronger than anticipated due to a faster ramp up in demand for outsourcing services and strong discretionary spend on consulting and technology services,” said Gordon Coburn, President. “Our continuous reinvestment in our business continues to help us strengthen our capabilities to address our clients’ dual mandate of driving greater performance in their current businesses, while positioning them better for future success.”
-
Morning News: November 5, 2013
Posted by Eddy Elfenbein on November 5th, 2013 at 6:11 amBOJ Struggles to Convince on 2% As Abenomics Shine Fades
EU Trims 2014 Eurozone Growth Forecast to 1.1%
Italian Banks Are Near Their Saturation Point on Government Debt
China Premier Warns Against Loose Money Policies
Vivendi Agrees €4.2 Billion Deal with Etisalat for Maroc Telecom
Fed’s Bullard: $1 Trillion a Year QE Pace ‘Torrid’
Gold Bug Schiff Counters Goldman on First Drop Since 2000
Gas and Food Prices Have Hit Their Lowest Levels of the Year
Twitter IPO More Expensive Than Facebook Without Profits
BlackBerry Comeback Hampered by Vanishing Cash
Gross Loses World’s Largest Mutual Fund Title to Vanguard
SAC Agrees to Plead Guilty to End Insider-Trading Case
J&J to Pay $2.2 Billion in Drug Marketing Penalties
Jeff Carter: The Key To Startup Success
Joshua Brown: Lifestyle ETFs and Investment Products Based on Belief Systems
Be sure to follow me on Twitter.
-
How Much Would You Pay?
Posted by Eddy Elfenbein on November 4th, 2013 at 8:18 pmWhat if I told you I had a company that last year generated $4 in sales? The problem is that I had $5 in expenses so we actually lost $1.
The good news is that things got better this year. For the first half, we generated sales of $3. But again, we spent heavily. We had expenses of $4 so lost lost another $1. We have $5 in debt.
How much would you pay for this company?
If you said $1,700, congratulations. That’s Twitter.
-
Damn It Feels Good to Be a Stock Picka
Posted by Eddy Elfenbein on November 4th, 2013 at 5:30 pmReuters notes that now is a good time to be a stock picker. While active managers usually lose to the market, it’s not happening this year. Of U.S. fund managers, 57% are beating their benchmarks this year. That’s their best showing in four years.
Implied correlations – a measure of how closely the performance of individual stocks mirrors that of the index itself – have fallen to their lowest since October 2007 after peaking in 2011, according to a research note from Cantor Fitzgerald. That means that instead of the returns of most stocks clumping close to the index returns, there is a much broader spread on how individual shares are performing.
That’s a sign that investors are picking winners and losers. It also suggests the bull market – which has carried the S&P nearly 170 percent higher since March 2009 – is starting to show its age. The S&P 500 has set 33 new highs this year after failing to reach record levels since 2007. Now there are fewer beaten-down stocks that offer the chance for a quick pop higher.
Instead of searching for screaming bargains, fund managers are turning their focus to well-run companies that have sustainable advantages and may hold their value during a downturn, however unlikely that may seem at the moment.
Of the S&P 500, the most stocks are positive YTD since at least 1980. This rising tide has lifted a heckuva lot of boats.
-
Is the Small-Cap Rally Already Over?
Posted by Eddy Elfenbein on November 4th, 2013 at 12:54 pmThe Russell 2000 has outperformed the S&P 500 for a remarkable 14-and-a-half years. The index reached a low relative to the S&P 500 on April 8, 1999. It’s interesting to see how the little guys were largely left behind in the big rally of the late 1990s.
Ever since then, the Russell has consistently outperformed the broader market. If the S&P 500 had kept pace with the Russell, it would be over 3,600 today. The most recent relative performance high came on October 1 of this year.
Since then, the small-caps have badly lagged and it got much worse last week. The Russell 2000 has underperformed the S&P 500 for the last six days in a row. Historically, these outperformance/underperformance cycles have run on for several years.
-
JPMorgan Raises Price Target on Cognizant
Posted by Eddy Elfenbein on November 4th, 2013 at 11:09 amFrom Barron’s:
Indian IT services provider Cognizant (CTSH) is scheduled to report its third-quarter earnings tomorrow.
J.P. Morgan raised its Q3 revenue estimate by $4.5 million to $2.27 billion on strong rupee and solid Q3 results already reported by Cognizant’s peers. Here are analysts Tien-tsin Huang and Puneet Jain:
[Tata Consultancy Services] TCS and [Infosys] INFY reported solid upside in C3Q revenue, driven by strong discretionary spending. Encouragingly, growth was broad based at peers, which bodes well for CTSH.
We expect a nice beat in C3Q results, relative to the company’s revenue guidance (of $2,250M+) and consensus estimate of $2,256M.
The broker expects Cognizant to raise its 2013 guidance:
We expect the company to raise its FY13 revenue growth guidance from 19% to 20%.
The $100 price target implies 18 times J.P.Morgan’s 2015 EPS estimate, or 20.8 times the broker’s 2014 estimate.
UBS is more cautious, setting a $92 price target, or 18.3 times their 2014 earnings.
Cognizant last traded at $87.8, giving the JPM price target a 14% upside.
-
Morning News: November 4, 2013
Posted by Eddy Elfenbein on November 4th, 2013 at 6:50 amECB’s Asmussen Says ESM Should Be Last Port of Call For Banks
EU Moots Funding Backstop For Non-Euro Zone Banks
What British Business Wants From a Reformed Europe
Gas Prices Are Declining, And It’s Turning Into Real Wealth Gains For Americans
Here’s How Every Sector Has Performed Compared to the Overall Stock Market
Twitter Debut Seen Setting the Tone for Social-Media Valuations
HSBC Profit Rises 30% on Cost Cuts as Currency Trades Probed
BlackBerry Bidder Faces Deadline to Seal Deal
Samsung Ready to Slowly Lift Veil to Investors
Alcatel Seeks $2.7 Billion After Stock Doubles Under Combes
Riding the Hashtag in Social Media Marketing
Jeff Miller: Weighing the Week Ahead: Time for a Year-End Rally?
Be sure to follow me on Twitter.
-
Frankenstein: Summary & Analysis by Thug Notes
Posted by Eddy Elfenbein on November 3rd, 2013 at 4:03 pm
-
- Tweets by @EddyElfenbein
-
Archives
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- July 2006
- June 2006
- May 2006
- April 2006
- March 2006
- February 2006
- January 2006
- December 2005
- November 2005
- October 2005
- September 2005
- August 2005
- July 2005
-
![StockTwits](https://webarchive.library.unt.edu/web/20131106060425im_/http://blog.stocktwits.com/wp-content/uploads/buttons.jpg)