Stock trading and investing was a far more free-wheeling affair in the first half of the 20th century. Back then, insider information was passed around freely, companies disclosed opaque and often misleading financial reports and traders frequently made use of such high levels of leverage that it makes a conservative-minded investor shudder.
There were many larger-than-life personalities among the titans of Wall Street in that bygone era. Yet, even in that colorful pack, Jesse Livermore stood out.
Introducing Jesse Livermore
Livermore made and lost huge fortunes over his decades as a stock operator and security analyst. His most famous triumph came in 1929 when his short of the stock market finally paid off with the worst crash in American financial history. While most of Wall Street was in ruins, Livermore was riding high. That victorious bear play, plus a less spectacular triumph shorting the 1907 crash, earned him the moniker of the "Great Bear of Wall Street.”
Today, securities analysis is a much more common field, and the experts have replaced the self-trained speculators of times gone by. But, while the particular stock market environment he knew is now gone, Livermore’s various insights on the behavior of stocks and markets generally have stood the test of time.
The remainder of this article explores a couple of Livermore’s timeless insights that continue to resonate with investors nearly 80 years after his death. The font of Livermore’s wisdom runs deep, so we will undoubtedly revisit his thoughts, philosophy and advice in future notes.
Day trading is (and always was) a loser’s game
Day traders have been hanging around the stock market forever, even during the Wild West days of early 20th century Wall Street. Even in those simpler and less refined times, serious stock market operators could see the perils of such behavior. Livermore certainly thought little of them:
“Money cannot be made consistently trading in stocks every day or every week during the year.”
“Get-rich-quick adventurers will die poor.”
“Speculators who try for profits from daily minor movements will never reap the major when they occur.”
These quotes highlight vital lessons for individual investors seeking to manage their own financial affairs and investment decision-making. During bull markets, day traders usually do all right, but when things turn south (as they inevitably do) it tends to bury these sorts of traders in the deluge. That is especially so for traders using significant leverage, or who are trying to play options without the proper education and experience in building effectively hedged options strategies.
Another insight we can glean from this group of Livermore quotations is trading daily or weekly movements will often leave an investor out of a stock or, even worse, on the wrong side of the big move when it comes. This is especially true of catalyst-driven stocks, in which many individuals play the day-to-day trading game despite the massive risk associated with being on the wrong side when the catalytic event finally occurs. That is especially so of catalyst-driven stocks for which the date, or date range, of the event is not clear.
Day trading is a dangerous business. Serious investors should shun such strategies. Even traders focused on broad market movements, rather than value or growth analysis of individual securities, should be careful not to fall into the day trader’s trap.
Taking and securing profits can be a good idea
Gains and losses from trading in the stock market can often feel divorced from reality, especially if one always reinvests and does not ever hold their money in their hands. Livermore has some advice on taking profits – and on making them feel concrete – that every investor should consider seriously:
“Feel the money in your own fingers once in a while.”
“Make it a rule each time you close a successful deal…to take one-half of your profits and lock the sum up in a safe deposit box.”
The first of the above quotes may hold a bit more concrete meaning in today’s market. It is definitely a good idea for an investor to occasionally make their activities in the stock market feel concrete. In other words, we can play the investment game at several levels – as a hobby, for personal wealth enhancement or as a professional – but it is still, fundamentally, a game of money. Your money. Remembering that it is real money, money that can be turned to cash in short order, and not just chips to fuel the game, is very important for an investor’s psychological resilience and long-term good decision-making. It helps keep one centered and aware of what the stakes are.
The second recommendation, to shift half of one’s profits from any major success into a safe-deposit box, is perhaps a bit more antiquated. In Livermore’s time, all financial instruments were risky and cash – especially gold-backed cash – was the only truly safe asset class out there. Thus, regularly taking some profits and shifting them to a safe place is not a bad idea. For value-oriented investors with a long-term view, it is obvious that downturns do occur – and often at inconvenient times. Having financial firepower in a safe place to weather storms, or to rebuild after unexpected catastrophe, is simply good strategy. It does not need to be gold in a safe-deposit box or cash in the mattress. Instead, an investor can allocate a piece of their portfolio to stable, safe investments such as triple-A corporate bonds or, safer still (though lower-yield), a basket of high-quality sovereign bonds. That will likely crimp some of the gains of an investment strategy, but it can provide a prudent source of security.
