How could an experienced trader lose his entire fortune?
Why didn’t Jesse Livermore follow his own trading rules? – rules that should quickly have closed his losing positions.
In 1917, with great foresight, Jesse Livermore had bought $800,000 worth of annuities. His objective was to ensure his family had an income in case he lost everything in the markets. He knew from experience how strongly the market could pull on every last cent a trader had.
“The reason I did this was not alone the fear that the stock market might take it away from me, but because I knew that a man will spend anything he can lay his hands on. By doing what I did my wife and child are safe from me.
“More than one man I know has done the same thing, but has coaxed his wife to sign off when he needed the money, and he has lost it. But I have fixed it up so that no matter what I want or what my wife wants… it is absolutely safe from all attacks by either of us; safe from my market needs; safe even from a devoted wife’s love. I’m taking no chances!”
So how could Livermore, who had explained the importance of his trading rules at length in Reminiscences Of A Stock Operator, fall into the trap that he had taken such pains to avoid – and taken such pains to protect his family from?
The answer is likely to be found in his mental state. Jesse Livermore was prone to depression.
Winston Churchill was one of the world’s most famous depressives – he called it the black dog. When people suffer a serious bout of depression they can become completely disinterested in their normal lives and feel incredibly fatigued. Their energy is sapped and often they just want to sleep. They can behave in ways they would normally describe as abnormal.
It may have been Jesse Livermore’s misfortune to enter highly leveraged trades just prior to suffering a debilitating black dog. The trades could have turned sour while Livermore’s mind was elsewhere. Livermore was notorious as a loner. The losing trades could not be closed except with his authority, yet he was not in a fit state to give that authority – or perhaps in his depressed mental state he did not care that he was losing money – perhaps he even welcomed it.
It’s hard to believe the Jesse Livermore portrayed in Reminiscences Of A Stock Operator, would have permitted himself to betray his own trading principles to the extent that he would lose $100 million. It seems plausible that the man who lost the money was an alter ego – a Mr. Hyde who tore apart the achievements of Livermore’s more usual Dr. Jekyll persona. Six years later, Jesse’s Mr. Hyde won the final battle. Jesse, suffering another deep depression, took his own life.