Trading Tips From The Speculator King

He made $100 million from the stock market long before hedge funds or any modern trading technology. He is known as the “Speculator King”. During the early 1900’s, this individual traded his own money in the stock market, just like an average investor.

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  • Unlike modern day hedge fund managers, he made no money from fees and costs. Instead, every penny he earned was directly from making wise investing decisions, not from other investors.

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  • If you haven’t guessed it, I am referencing the legendary Jesse Livermore.

    Livermore’s tale is one that has always held me spellbound. Numerous lessons abound from his epic successes and failures.

    Jesse did nothing in a small way. From his mansions, yachts and lifestyle, he was like the Donald Trump of the early 20th century.

    He made and lost multiple fortunes over his career, but his life ended tragically. Back in 1929 he made $100 million during the great crash. This amount is equivalent to over $1 billion in today’s dollars. When I say this guy was wealthy, there is no question about it!

    Livermore was keenly aware of his own shortcomings. Despite all his wealth, he fought self-destructive demons that ended up ruining his life.

    Nevertheless, Livermore left investors with many lessons that remain very relevant today.

    A Brief History of the Speculator King

    Jesse Livermore’s father wanted him to be a farmer. But this soon-to-be-famous investor knew his calling was in the stock market from a very early age.

    Conflicts with his father caused Jessie to run away from home at the age of 14. His talented mathematical mind and passion for the stock market enabled him to get a job as a quotation boy at a local stock brokerage.

    Back then, before computers and real time feeds, young people were hired to manually change the numbers on large boards that listed stock quotes for investors hanging out at the brokerage house.

    Fate had a much larger role for Jesse to play. He started dabbling in the market by risking his hard earned salary in the off-exchange stock trading parlors of the day called “bucket shops”.

    These places were like magnets to degenerate gamblers and other hard-living party type people. Think of the off-track betting parlors and small, smoky poker rooms as the equivalent today.

    His math genius brain quickly began to discern repeating patterns in stock prices. This talent earned him enough money by the age of 21 to move to New York City, the epicenter of the financial world.

    Once in New York, this young financial wizard turned his full attention to the legitimate stock exchanges.

    He quickly built a reputation as a master stock trader. He earned around $3 million dollars shorting stocks during the 1907 crash. Then he made approximately $100 million after the great crash of 1929.

    Surprisingly, despite his vast success, he had to declare bankruptcy after losing 90% of the $3 million made during the 1907 crash. This was mostly due to a single trade in Cotton. He broke his personal investing rules by continuing to buy the commodity as it was dropping in price. He started over with a greatly diminished portfolio… and… rode the World War One driven bull market to another large trading stake.

    His legendary status was cemented in history during the great crash of 1929. That’s when he successfully shorted stocks and earned over $100 million.

    Although he enjoyed great success, he also had his demons. Livermore was married three times. His third marriage was to a woman whose last four husbands committed suicide. Which clearly shows his personal life was in serious disarray.

    By 1934, this once mighty fixture of the financial markets was broke again. His membership to the Chicago Board of Trade was automatically revoked due to lack of capital.

    Finally, in 1940, a lifelong battle with depression resulted in his committing suicide in a coat room at the Sherry Netherland Hotel in New York City.

    At the time, Livermore claimed to be completely financially broke. However, this historic investment wizard left $5 million in cash and trusts at his death.

    However, much more important than his money, was the timeless wisdom he left for all investors.

    Today, many years after his untimely death, investors still follow the investing advice in his book, “How to Trade in Stocks” and his biography “Reminiscences of a Stock Operator”.

    I strongly recommend these books to anyone interested in the building blocks of investing success.

    The primary lesson I learned from reading Jessie Livermore’s writings is very simple yet profound.

    He taught to look for obvious trends in price, set a price level on the chart (which he called pivot points)… then… buy or sell the stock depending on how price acted once it hit the pivot point.

    Pivot points are the same thing as support and resistance levels.

    This tactic, although perhaps older than Livermore himself, still continues as a steady source of profits for traders. Here’s how it works: Imagine the pivot point sitting at $25.00 per share in a stock. Once price hits $25 on the way up, you wait for it to break through the line for a certain number of tics. You could wait for price to hit $25.50 then enter your position long. On the other hand, if price hits the $25 pivot or resistance point and starts falling, you would enter short at $24.50 in the anticipation that the down move will continue.

    Jesse Livermore’s 3 Primary Trading Rules

    1. Never Quit

    Jesse is proof that investors can come back from large losses. Do not give up even if you experience a large loss. Most super-successful investors have experienced steep draw downs in their careers. Do not be discouraged!

    2. Test the Market

    This is my favorite Livermore trading rule. He strongly believed in testing his trading ideas first, prior to committing a large sum of money. Enter the trade with just a small portion of your allotted capital for the trade. Should the market travel in the direction you expect, add to the position. That way, if your investment thesis is wrong, you only lose a small amount of capital. However, if proven accurate, you can increase your position size with greater confidence.

    3. Never Average Down

    Jesse failed to follow this rule on several occasions and it led to his demise. Never add to a losing position trying to average down your losses. The market can easily keep moving against you. While there are a few exceptions to this rule, (such as controlled averaging down with a preset amount of capital), most of the time it makes perfect sense.

    The Key Takeaways

    Jesse Livermore lived a life worthy of the greatest hedge fund honchos of today. Despite battling personal demons, he left a legacy of investing truths still relevant today. Every investor should read his book and biography at least one.

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