Wisdom of Jesse Livermore

By | December 24, 2014

Legendary speculator Jesse Livermore is surely one of the most fascinating characters in all of financial-market history.

About a century ago Jesse Livermore blossomed into one of the most celebrated speculators of all time.  He was trading heavily in the early decades of the 1900s, a wondrous era to speculate in stocks.  His renowned exploits are still viewed with great awe and reverence by today’s elite speculators and his towering speculation wisdom will stand tall for ages to come.

If you are interested in more background information on Jesse Livermore and my reasons behind writing this series of essays on the man’s awesome speculation wisdom, you may wish to skim the introduction of the first essay in this series.

Mr. Livermore’s exploits were recorded in the greatest book on speculation of all time.  Originally published in 1923, it is called “Reminiscences of a Stock Operator” and was written by a gifted financial journalist named Edwin Lefevre.  Mr. Lefevre penned the account as if from the first-person perspective of a fictional trader named Larry Livingston.  As Lefevre had spent weeks extensively interviewing Jesse Livermore, market historians are virtually unanimous in viewing Lefevre’s classic book as a thinly-disguised biography of Livermore’s trading life.

Today “Reminiscences of a Stock Operator” is fondly read with awe by speculators of all levels and abilities all around the globe.  I have personally read the book many times and I try to re-read it at least once a year now.  The speculation wisdom contained within these magical pages is just awesome and truly priceless for all speculators to digest.

If you are interested in speculation and you haven’t read the book yet you owe it to yourself to buy it today atAmazon or Barnes & Noble.  I can almost guarantee that it will forever change you as a speculator and help you soar to new heights of understanding of the game and achieving real-world success.

Jesse Livermore’s words and experiences are so endearing and powerful because he presents himself as just another mere mortal like you and I, with hopes, fears, and frailties.  He is brutally honest in critiquing his own evolution as a speculator and thoroughly explaining his own mistakes and the great wisdom they ultimately led to.

In this series of essays Jesse Livermore’s wisdom is presented chronologically from the book.  All the bold-faced passages below are his words directly out of Lefevre’s book, while the following normal text is my own feeble thoughts and commentary attempting to pull Livermore’s wisdom a century into the future to today.  Before every quotation below, the chapter in “Reminiscences” from which it is pulled is noted so you can quickly find it and dig deeper by reading the valuable surrounding background context if you wish.

I hope and pray that you find Jesse Livermore’s awesome wisdom as exciting and valuable as I have!

(Chapter V) … “It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.”

There is a fine line between gambling and speculating.  While even speculators often use these words interchangeably, they are separate and distinctive undertakings.  Understanding these subtle yet important differences is crucial as it helps speculators steer clear of pure gambles and naturally migrate towards actual intelligent speculations.

Gambling involves games of chance where probabilities remain constant.  For example, if you have played poker 10 years ago, today, and will play a decade in the future, your probability of drawing a given hand out of a deck of 52 cards is identical across all of these time periods.  For the most part, in pure gambling the gambler has no control over the odds of his game, which means that his decision of when to make his bet is largely irrelevant.  Odds are fixed, probabilities are known in advance, and nothing will change them.

Speculation, on the other hand, is a grand game of chance where the probabilities of winning constantly shift.  While it makes no difference when you play poker, because the probabilities governed by a fixed 52-card deck are constant, it makes a huge difference when you deploy a particular speculation.  There are periods of time throughout market history where one particular type of speculation may have a 90%+ chance of winning, while at other times this exact same speculation may only sport 10% winning odds.

The art of speculation involves relentlessly studying the markets, becoming intimately familiar with their countless peculiar ways and idiosyncrasies.  The object of this lifelong pursuit is to gain the priceless knowledge base necessary in order to understand in real-time when probabilities swing vastly in favor of a particular speculation.  Unlike a gambler, a speculator cannot successfully play the game at any time.  The speculator patiently waits until the odds are wildly on his side that a certain market move is “inevitable”, to use Jesse Livermore’s immortal words, before launching his trade.

As an example, when the elite implied volatility indices like the VIX soar to huge vertical spikes, there is a 95%+ probability that a short-term bottom has been carved and the next major market move will be higher.  A speculator learns to recognize these patterns and principles by studying market history, and then applying these important lessons in real-time going forward.

The continuously variable odds of speculation mean that timing is everything.  Gamblers can gamble anytime, because their odds are fixed and they know what they face.  Speculators can only speculate at certain opportune moments, as their odds swing wildly based on market conditions and they do not know in advance when a wonderful high-odds trading opportunity will arise.

The real game of the markets lies in intelligent speculations, anticipating major market action based on similar setups in the past, not mere gambles, or wild guesses, subject to the capricious whims of chance.  The very best speculations are high-probability opportunities based on “anticipating inevitable advances and declines” that history strongly suggests are imminent.  Jesse Livermore understood this crucial lesson so well.

(Chapter V) … “When I think I have found the solution I must prove I am right.  I know of only one way to prove it; and that is, with my own money.”

Speculation is essentially a form of puzzle-solving, or code-breaking.  A speculator, especially in today’s wondrous young Information Age, faces effectively infinite inflows of incoming information.  The speculator must sort through all these countless puzzle pieces, prioritize them, decide what is truly important, discard the rest of the data chaff, and then meticulously line up these important pieces to create a sound prognosis of near-future market action.

Once these pieces are properly lined up and the speculator thinks the puzzle is solved, there is only one single way to prove that his solution is correct.  His own scarce capital must be deployed in line with his analysis in order to see if his particular puzzle-solving and code-breaking was really properly executed or not.  One of the key differences between speculators and Wall Street analysts or market pundits is that speculators always have to back their market ideas with their very own real hard-earned capital.

So, if you enjoy studying the markets but are not willing to trade your own capital based on your own analyses, then you are not a speculator.  It’s not until you go above and beyond, risking part of your own fortune in the very markets that you are analyzing, that you can really prove if your puzzle-solving and code-breaking skills are up to the challenge or not.  Until your own real capital is risked, you are not a speculator.  Paper trading, which Jesse Livermore often makes fun of, is not speculation and is meaningless.  Only real capital deployment in real markets can prove a market puzzle solution and define a true speculator.

(Chapter V) … “But I am not sure of the exact value of losing, for if I had lost more I would have lacked the money to test out the improvements in my methods of trading.”

Losing on trades is just one of the occupational hazards of speculating.  Everyone loses from time to time, from novice traders to elite speculators.  Since none of us mere mortals can see the future, the best we can do is trade on probabilities for potential future market behavior based on our studies and observances of the past.  Yet, even in a highly promising trade with a 90% chance of winning, that still leaves a substantial probability of losing.

Earlier in Reminiscences, Jesse Livermore wonderfully articulated the valuable side benefit of losing on trades, primarily that each loss can teach the speculator a priceless lesson to help him avoid a similar loss in a similar situation in the future.   There is nothing like a painful and costly bad trade to teach a speculator what not to do in the future in order to win on balance!

But, while losses will happen and they do teach fantastic lessons, these losses must be contained.  In this excellent quotation Jesse Livermore points out that losses are dangerous if they leave a speculator with little or no trading capital for future speculations.  A speculator must always ensure that he never bets enough at any one time to totally wipe him out if his trades end up turning sour.  Capital preservation is incredibly important for the long-term viability of any speculator.

One of the great challenges of speculation is moderation in initially deploying positions.  Trades always look promising up front, and from time to time great trades come along that look like staggering opportunities.  But even on these a trader must never throw all of his eggs in one basket!  The only way to live to see another trading day is to never bet your whole fortune, not even anything close to your entire speculative capital pool, on any single trade.  A one-horse trader is only one trade away from ruin, which will come sooner or later as a mega-trade fails and the speculator has no capital left after that.  Easy come easy go.

So, while losses certainly do teach valuable lessons, make sure you limit your risk and preserve your capital by not betting too large on any particular trade.  To become a great speculator you first have to survive, which means diligently ensuring that you always have a trading capital pool available even when some of your individual trades have failed and ended up deep into the blood-soaked red.


(Chapter V) … “They say you never grow poor taking profits.  No, you don’t.  But neither do you grow rich taking a four-point profit in a bull market.”


One of the primary reasons why becoming an elite speculator is so incredibly challenging is because so many of the keys to speculation are exactly contrary to our usual human nature.  For example, we humans are created by God to be inherently emotional creatures, and our emotions serve us really well as we interact with each other in normal life.  Yet, in the markets, human emotions are absolutely lethal, especially greed, complacency, and fear.  It is a very long and difficult undertaking to learn how to relentlessly suppress your own innate emotions while speculating.


Similarly, we humans have a natural tendency to immediately want to take profits and realize them, while vainly letting our losses run in the hopes we can sell out later when we are “back to even” again.  As Jesse Livermore wisely points out above though, this is exactly the wrong way to play.  While taking profits early doesn’t lead to poverty, neither does it lead to riches.  Rather than following our natural human instinct of grabbing any profit fast while letting losses multiply, instead speculators have to force themselves to let their profits run andimmediately cut their losses.


Personally, as I have struggled over the years to learn to let my own profits run while rapidly assassinating my losses, the most useful tool I have found to short-circuit my own dangerous emotions is the simple trailing stop-loss.  Much ridiculed, stop-losses are awesomely powerful speculation tools when used prudently.  While buying is always easy, selling is always hard, and the stop-losses utterly remove our dangerous emotions from selling decisions.


When you launch a new trade, simply decide ahead of time what you are willing to lose if your trade turns south.  If you decide it is 20%, put a 20% trailing stop on your position.  Then once your trade falls by 20% from its latest interim high, it is sold immediately with no questions asked.  The stop-loss is mechanical and triggers instantly when the moment to sell is reached, not allowing your emotions time to fester and cloud your ice-cold and razor-sharp speculator judgment.


In the upcoming September issue of our acclaimed Zeal Intelligence newsletter for our subscribers, I go into much greater depth discussing how to practically set your own stops in your own real-world speculations and investments.  Please consider subscribing today!


Jesse Livermore wisely points out that taking small profits in a bull market will not lead to wealth.  Neither will allowing huge losses to multiply in a bear market.  The simple stop-loss resolves both these problems.  In bull markets a properly set stop keeps you in winning trades for as long as possible, your profits continue accumulating unmolested until a large enough pullback materializes to trigger your stops.  Stop-losses help you let your profits run.


Similarly, on the other side of the coin the stop-loss gets you out of losses fast, before they spiral out of control.  Once your stop-loss at say 20% is hit, you are done and your trade is automatically closed.  There is no time to think or talk yourself into waiting “just a few more days” for your position to recover.  The powerful emotion of hope is always involved in letting losses run, and it is incredibly dangerous in the markets.


So do not get over-eager to realize small profits!  Like Jesse Livermore, give your profits the time and patience to let them multiply dramatically into large profits before you harvest them at maturity.  Stand back and grant them the necessary room to grow and flourish!  Especially if you are fortunate enough to be trading in a major secular bull market, such as the awesome examples now unfolding in both gold and gold stocks, you must let your small profits continue to run into large profits rather than yanking them off of the table all the time.


(Chapter V) … “This semisucker is the type that thinks he has cut his wisdom teeth because he loves to buy on declines.  He waits for them.  He measures his bargains by the number of points it has sold off from the top.”


The fifth chapter of Reminiscences is graced with an awesome discussion on suckers.  Jesse Livermore articulately waxes into deep and entertaining depth about the various kinds of suckers, fools, who are bound to lose money in the stock markets.  One of the key purposes of the financial markets is to relentlessly move capital out of weak into strong hands, and the suckers are always fleeced as they make worn-out old mistakes due to their lack of diligence in acquiring priceless market knowledge and wisdom before speculating.


The couple sentences above on the “semisucker” really ring true today as we struggle through this wicked Great Bear market.  This type of sucker actively seeks to buy stocks on declines because he thinks that any decline from a major top must mean that a stock is a bargain.  The trap here is to believe that quoted stock prices alone reveal true absolute value, which is just not true.  A stock can fall 80% or more and still be a terrible deal at 20% of its former highs.  This lesson is particularly relevant today in tech-land, ground zero of our mighty bust.


Since the March 2000 NASDAQ top, many tech stocks have plummeted 50%, 75%, or even more.  A common mistake made all the time today, and constantly promoted on bubblevision, is to assume that a stock is a great “bargain” today simply because it is trading a long ways below its bubble top.  A random tech stock may have traded at $80 near its all-time March 2000 high, but at $20 today is it a bargain?  Not necessarily!


Stocks are only bargains or not relative to their underlying fundamentals, not absolute price levels.  If our example tech company traded at 100x earnings in March 2000, while its historical long-term average was 20x, it was simply far too expensive during the bubble.  If it fell 75% to $20 a share, it is still only a bargain or not based on its current fundamentals, not merely its absolute loss of stock points.  If it is now trading at 10x earnings, half of its long-term average, then it is a bargain regardless of its stock price.  But if it is now trading at 40x earnings at $20, it remains far overvalued and ripe for a continuing plunge!


As Jesse Livermore prudently pointed out in his wonderful discourse on suckers, stock bargains can never be measured merely in terms of how many points a given stock has fallen.  Many other factors including fundamental valuation and prevailing market trends must also be considered in addition to a stock price in order for a speculator to determine if a potential trade is really a great deal.  Absolute price declines are totallymeaningless in isolation.


Measuring value based on declining index points alone is inherently flawed and will eventually lead the semisucker into ruin.  Every time you hear a financial “expert” on TV say that a stock is a bargain because it has “fallen $XX from its high”, realize that this statement is utterly nonsensical in the absence of additional information.  Value and bargains can never be measured by stock price alone.

6 thoughts on “Wisdom of Jesse Livermore

  1. SP Iyengar

    Thanks for your wonderful explanations, which help us to understand the concepts clearly.. You are really a great teacher in addition to being an excellent chart analyst.. Thanks again for the good post.. Keep such posts to help us regain confidence!!

  2. Vijay Kumar Rao

    Once again very good article and would like to thank you for reminding me to read “Reminiscences of a Stock Operator” once again. As bad habits creep in I did not read it since long.

    As ever please continue your great service

  3. rashmi

    sir,today premium in jan futures is more than 100 in nifty futures and 200 in bank nifty.what does it imply?

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