Coming out of the crash of 1929, one trader stood above the rest. Jesse Livermore was one of the few who foresaw the crash and leveraged that market awareness into gains of $100 million - or $1.39 billion in today's dollars. Those gains turned him into one of the top 10 richest men in the world.
Five years later, he filed for bankruptcy after squandering the fortune of a lifetime trading.
How did it happen?
Jesse Livermore's career is one of great success and spectacular failures. He made and lost many fortunes during his trading career. In Reminiscences of a Stock Operator, a 1923 biography of Livermore by Edwin Lefèvre that has become a staple at many traders' desks, Livermore discusses candidly how his psychology got in the way of keeping profits.
But even being so self aware of mistakes he made previously, he was unable to keep from over leveraging himself and losing his entire fortune.
In Jesse Livermore - Boy Plunger, Tom Rubython says of the period during which Livermore lost his $100 million fortune:
"In truth, it was a period of total inconsistency and illogicality during which, by his own rules, he should have been out of the market sitting on his money. But he wasn't. Having conquered the world, he wanted to climb the mountain again."
Livermore lost 40% of his profit in 18 months - going long the stock market as it slipped to its lows by mid-1932. Then in 1932, Livermore switched went short the market - just in time for it to double. The final blows were caused in 1933 when Livermore went long the market just as it fell back near its 1932 lows.
He was wiped out. Not only did Livermore not have a dollar to his name, but he was in debt $5 million, roughly $70 million in today's dollars, to various stock brokers who advanced him money to trade.
Livermore's tale of spectacular success, excess and failure brings three lessons for modern futures traders:
- Set hard and fast rules. Traders consistently ask us why we have daily and weekly loss limits during Funded Trader Preparation™ and in a Funded Account™ that cut a trader off when they've reached certain levels. On an extreme level, this is why. Traders can easily slip from the mentality of being a risk manager to a gambler - allowing venom to come into their thinking process. As traders, that is deadly. When we are not seeing the market correctly, we need to fall back on objective rules set outside the heat of the moment. That means that we need to take time off, trade lower size and get our head right. Otherwise, we don't stand a chance at keeping the money we do make.
- Don't put your lifestyle at risk trading. It should have been a warning sign to Livermore that he had consistently put his entire fortune at risk trading in the past. He made his first fortune - $3 million - after the crash of 1907. However, in the next four or five years, he hit a rough patch that caused him to go broke and declare bankruptcy for the first time in 1915. Livermore tried to put in place financial protections for his family - purchasing annuities and putting money aside in a trust. Ultimately, those protections were not enough because the one thing that mattered most did not change - the leverage he used in trading.
- Poor risk management can wipe away years of gains. The other striking thing to learn from Livermore is how quickly years of solid trading can go up in smoke. During the bull market that surrounded World War I, Livermore was able to recoup his fortune and pay back all his creditors from the 1915 bankruptcy. It took him 14 years of grinding to amass the largest fortune of his life. Ultimately, all that hard work was lost in five short years. And that final blow was one that Livermore was never able to recover from.
Ultimately, to be successful in markets, you have to manage risk better than Jesse Livermore. If not, you are gambling - you're not trading.