This is part three of a multi-part series on Jesse Livermore. One of the financial world’s most important historic figures, Jesse Livermore made a fortune as a market speculator in the first half of the last century. Parts one and two of this series can be found at the links below.

To ensure you do not miss the rest of the series sign up for our free newsletter.

Jesse Livermore — Part three: The ups and downs of trading

“This is the tale of a man who made and lost millions in the stock market and then came back and made more millions…”

Jesse Livermore was as famous for his ability to lose his money as he was for his ability to make money.

Indeed, Jesse Livermore’s career on Wall Street is a model of both how to trade, and how not to trade. When Livermore was aged 20, he was worth $20,000, around $560,000 in today’s dollars. A year later he had lost this small fortune. In 1908, Jesse Livermore told the press that he had amassed a fortune worth $3 million. Two years later that fortune had disappeared. By 1917, he had rebuilt his $3 million fortune once again, although $2 million of this was used to repay debts when he declared bankruptcy in February 1915. In the crash of 1929 Livermore’s fortune peaked at around $100 million, a huge sum at the time, worth billions in today’s dollars. However, once again, by 1934 he had lost everything. In 1940, suffering from depression, Jesse Livermore committed suicide.

With returns like these it’s clear that Jesse Livermore’s trading strategy was not a model approach. True, he made a huge fortune several times over his career. Additionally, his ability to read market movements was unparalleled. However, Jesse Livermore’s bet-the-house method of speculation was guaranteed to lead to ruin in the end.

Nevertheless, the way Livermore made his trades, and the way he recovered from losses is truly fascinating.

The first fortune

In 1901, after several years trading in bucket shops and on the NYSE through a legitimate stockbroker, Jesse Livermore had amassed a fortune of $50,000. In true Livermore style, this entire fortune was lost in a single day of frenzied trading during 1901. Livermore blamed this loss on the ticker tape. The prices on the tape lagged the market by a huge degree (as was common in those days) and Livermore did not manage to pay the prices he wanted to pay, for the stocks he wanted to buy.

After this loss, Livermore moved away from New York, back to trading in bucket shops. The sums involved go from the tens of thousands, down to just tens. After a year of consistently beating the market, Livermore returns to New York and takes up his high-flying life as an NYSE speculator again.

“The loss of the money didn’t bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.” — Jesse Livermore

The second fortune

The papers were (you can still read the stories in the Google news archives) filled with stories of Jesse Livermore’s success during this time. One such story was Jesse’s seemingly outlandish bet against Union Pacific, which marked a new chapter in Livermore’s life:

“One day in early 1906, a Wall Street speculator named Jesse L. Livermore dropped into a brokerage office in Atlantic City where he was vacationing, and casually looked over the quotation board to see how the stock market was doing. It looked healthy — the Dow Jones was up several points. [Authors note: the Dow Jones Industrial Average pushed above 100 for the first time in January 1906.]

Livermore’s eye lit on Union Pacific, one of the railroad giants which were considered the prime stock market investments of the period. He picked up a pad and wrote an order to sell a thousand shares of Union Pacific “short”…Knowing the solid reputation of Union Pacific, the brokerage manager wondered whether Livermore hadn’t made a mistake — perhaps he had meant to buy — not sell — the thousand shares. But no; Livermore wanted to sell another 2,000 shares short. A day later he repeated that order, and then he cut his vacation and returned to New York city to keep a watch on the action. He knew nothing about Union Pacific that other speculators didn’t know…Certainly he could not have known that the San Andreas Fault, running up the coast of California, would shift at 5:13 a.m. the next morning, Apr. 18, 1906, bursting the water mains in San Francisco and starting fires that wiped out the city — along with millions of dollars of Union Pacific property.

Even so, the railroad stock remained strong, and Livermore stood to lose a half a million dollars…he held firm until the full details of the tremendous earthquake and the fire destruction reached New York. Now the traders panicked, and Livermore hastened the plunge of the stock by selling still more shares short. When the market reached its lowest point, he brought back all of the shares he had sold. His profits ran to a quarter of a million dollars…”

This one extremely successful trade [gamble?], put Livermore on a course to make his first million dollars from trading during 1907, only to go bankrupt once again a few months later.

Jesse Livermore -- Part Three: The Ups And Downs Of Trading