Jesse Livermore: The Man Who Shorted the 1929 Market Crash

Jesse Livermore is renowned as one of the most influential traders in financial history, celebrated for his extraordinary ability to profit from market downturns. His trading career, which spanned from the late 19th century to the early 20th century, was marked by significant achievements, including his notable short sale during the 1929 market crash.

Livermore’s approach to speculation and trading helped shape modern strategies, particularly in navigating panic-driven market conditions. His remarkable intuition for stock movements and ability to read market psychology continue to fascinate modern traders.

Key Takeaways

• Livermore’s trading career and his impact on modern trading strategies.
• The significance of his 1929 market short sale.
• His approach to speculation and market psychology.
• Lessons from Livermore’s successes and failures.
• The relevance of his strategies in today’s markets.

The Rise of a Trading Legend

At just 14 years old, Jesse Livermore began his career in the stock market, working as a “chalk boy” in a Boston brokerage firm. His early start in the finance world marked the beginning of a remarkable trading career. Livermore’s natural aptitude for mathematics and numbers helped him recognize patterns in stock prices, laying the foundation for his future success.

As he watched price movements on the ticker tape, Livermore began to develop his initial trading theories. His observations of market behavior during his formative years shaped his unique approach to trading. This early experience played a crucial role in Livermore’s life and history as a trader.

From Bucket Shops to Wall Street

The path to Wall Street for Jesse Livermore was paved with experiences in bucket shops, where he honed his trading skills.

Bucket shops were gambling-like establishments where individuals could bet on stock price movements without actually owning the stocks. Livermore’s exceptional ability to recognize patterns allowed him to profit consistently, despite the rigged nature of these shops.

His success was so remarkable that he was eventually blacklisted from most bucket shops, forcing him to transition to legitimate trading on Wall Street. This transition required Livermore to adapt his strategies to the real market conditions, making more complex trades.

Livermore’s early experiences significantly shaped his trading philosophy, preparing him for bigger opportunities. Jesse Livermore became a notable figure in the trading world due to his skills honed in bucket shops and later applied on Wall Street.

The Panic of 1907: Livermore’s First Major Success

The Panic of 1907 marked a significant turning point in Jesse Livermore‘s career, as he successfully predicted and profited from the market crash. Initially, Livermore was trading on the long side, following the trend that emerged after the “Rich Man’s Panic of 1903.” However, during a trip to Atlantic City in the spring of 1906, Livermore had an epiphany, sensing that Union Pacific’s stock was poised to decline.

Acting on his intuition, Livermore began shorting Union Pacific, and just two days later, the San Francisco earthquake struck, yielding him a profit of $300,000. Emboldened by this success, Livermore continued to aggressively short the market, eventually making around $300,000 from his trades as the panic unfolded.

This experience not only brought Livermore significant financial gain but also established his reputation on Wall Street, validating his contrarian trading strategy and reinforcing his confidence in his ability to read market sentiment. Livermore’s success in 1907 was a defining moment in his career, showcasing his skill in navigating turbulent markets and cementing his legacy as a pioneering trader.

Cornering the Cotton Market

The Chicago cotton market was where Jesse Livermore made his mark, demonstrating his ability to capitalize on market opportunities. On two occasions, Livermore cornered the Chicago cotton market, showcasing his bold trading strategies and market savvy. The first time, he acted after Percy “Cotton King” Thomas failed to corner the market and went broke, leaving cotton in a severe bear market.

Livermore quickly seized the opportunity, buying 120,000 bales of cotton. His aggressive buying pushed the price up, but not enough to close his large position in the illiquid cotton market. To address this, Livermore used a now-illegal tactic called “painting the tape,” making large buy orders at market close to influence future trading sessions, ultimately allowing him to liquidate his position at a profit and make a significant fortune.

Livermore’s actions in the cotton market demonstrated his extraordinary understanding of trading and commodity markets, as well as his ability to adapt and execute complex strategies. His second attempt to corner the cotton market after World War I led to a meeting with President Woodrow Wilson, further highlighting his influence in the stocks and commodity trading world.

Jesse Livermore’s Trading Strategy

At the heart of Livermore’s achievements was a robust trading strategy that stood the test of time. Livermore was a master of “tape reading,” a technique involving the interpretation of stock price movements through ticker tape data. This skill allowed him to discern accumulation or distribution patterns and accurately gauge market sentiment.

Livermore’s approach was characterized by meticulous planning and precise execution. He emphasized the importance of “being right at the right time” and often traded in the direction of the prevailing market trend, letting profits run while cutting losses quickly—the core of a trend-following strategy. This intuitive approach was complemented by a disciplined risk management framework, where he would never let a position go against him by more than 10%.

Livermore focused on trading leading stocks—those at the top of their sector or industry group—rather than weaker “junkyard” stocks. He adapted his trading timeframes from short-term bucket shop trading to longer-term position trading on Wall Street, showcasing his versatility as a trader. Livermore’s strategies have had a lasting impact on modern trading approaches, remaining relevant in today’s market.

The Great Depression: Livermore’s Greatest Trade

In the midst of the 1929 market frenzy, Jesse Livermore sensed an impending disaster. The stock market was at its peak, with everyday investors heavily invested in the market’s hot stocks. However, Livermore, being a natural contrarian, was on the lookout for the first sign of weakness to sell his long positions.

When leading stocks failed to make new highs, Livermore recognized this as a sign of underlying market weakness. Over the following months, he methodically sold his long positions into strength and began taking small, probing short positions in the market. Despite initial losses of around $250,000 on his early short attempts, Livermore persisted, demonstrating his conviction and patience.

Livermore’s persistence paid off on Black Tuesday, a day that would become infamous in American financial history. His timing and execution during the subsequent market collapse led to his most profitable trade. Livermore reportedly made $100 million on his Great Depression short, a sum equivalent to approximately $1.5 billion today.

This trade not only cemented Livermore’s reputation as “The Boy Plunger” but also showcased his contrarian approach and market intuition, allowing him to profit while most investors were devastated by the crash. Livermore’s success during the Great Depression remains one of the most celebrated stories in trading history, highlighting the importance of independent thinking and strategic risk-taking in the world of trading.

The Boy Plunger’s Market Psychology

Jesse Livermore, famously known as the “Boy Plunger,” attributed his trading success to his comprehension of market psychology. He believed that understanding human nature was crucial in predicting market trends.

Livermore’s quote, “What has happened in the past will happen again. This is because Markets are driven by humans, and human nature never changes,” highlights his belief in recurring market patterns. His ability to profit from falling prices during market crashes earned him his nickname and significant wealth.

Livermore emphasized the importance of emotional discipline in trading, stating that “successful trading is always an emotional battle for the speculator, not an intelligent battle.” This mindset allowed him to make objective decisions, unlike many other traders who were driven by fear or greed.

The “Boy Plunger’s” insights into psychology continue to influence modern trading practices, offering valuable lessons for traders today.

How to Trade in Stocks: Livermore’s Legacy

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In ‘How to Trade in Stocks,’ Livermore distilled his years of experience into a comprehensive guide that still resonates with traders today. This book is a treasure trove of trading strategies and risk management techniques.

Livermore’s work provides a detailed analysis of his trading principles, including the importance of trading market leaders and following the prevailing trend. His pioneering use of pivot points and price patterns remains fundamental to technical analysis.

The book introduced innovative concepts like Livermore’s “money management formula” and emphasized the importance of keeping detailed trading records. As a result, “How to Trade in Stocks” remains a valuable resource for traders, offering advice on navigating the complex world of finance.

The Cautionary Tale: Livermore’s Downfall

The tale of Jesse Livermore is one of extraordinary success and devastating failure. Despite his remarkable trading achievements, Livermore faced significant financial setbacks, including four bankruptcies, highlighting the market’s fickleness and the need for humility in trading.

Livermore’s aggressive trading style and tendency to take large positions increased his vulnerability to market reversals, contributing to his financial downfall. His personal struggles, including troubled marriages and the psychological toll of his volatile financial circumstances, further complicated his life.

The tragic end to Livermore’s life in 1940, when he took his own life while nearly bankrupt, serves as a stark reminder of the psychological challenges of trading and the dangers of not maintaining strict discipline. His story is a cautionary tale about the importance of risk management and emotional control in trading.

Lessons for Modern Traders

Jesse Livermore’s trading career offers invaluable insights for modern traders looking to navigate today’s complex market landscape. One of the key takeaways from Livermore’s approach is the importance of having clear trading rules and the discipline to follow them consistently.

Livermore’s emphasis on risk management is another crucial lesson. He advocated for not letting a position go more than 10% against you, a principle that translates to modern risk management strategies using metrics like ATRs or ‘R’.

Modern traders can also learn from Livermore’s advice to trade with the trend and focus on leading stocks. Additionally, his scaling approach to building positions and the psychological insights he developed over his career provide valuable guidance for traders today.

By studying Livermore’s successes and failures, traders can gain a deeper understanding of the importance of discipline and risk management in achieving long-term trading success.

Conclusion

Jesse Livermore’s story is a timeless guide for navigating the market’s complexities. His innovative methods and enduring legacy continue to influence traders today. Livermore’s life serves as a reminder of the emotional rigors of trading.