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The Jesse Livermore Trend Following Legacy

Jesse Livermore was an outstanding trader. The insights he shared with the world are invaluable. Josh Brown wrote a great article featured on www.ritholtz.com pointing out some of his great nuggets of wisdom as well as how he would react in this day and age with news outlets streaming 24/7:

There are those who would convince you that it is somehow smart or in your best interest to be manically switching your investments around, back and forth, long and short, on a daily basis. To pay attention to this kind of overstimulation is the height of madness, even for professional traders.

The most storied and important trader who ever lived, Jesse Livermore, would be tuning these daily buy and sell calls out were he alive and operating today. Because while he was a trader, he was not of the mindset that there was always some kind of action to be taking.

Jesse Livermore’s legacy is a bit of a double-edged sword…

On the one hand, he was the first to codify the ancient language of supply and demand that is every bit as relevant 100 years later as it was when he first relayed it to biographer Edwin Lefèvre. Livermore himself sums it up thusly: “I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”

On the other hand, Livermore’s undoing came at precisely the moments in which he ignored his own advice. After repeated admonitions about tipsters, for example, Jesse allowed a tip on cotton to lead to a massive loss which grew even larger as he sat on it – violating yet another of his own cardinal rules.

And of course, other than for a few moments of temporary triumph in the trading pits and bucket shops of the era, Jesse Livermore was not a happy man. “Things haven’t gone well with me,” he informed one of his many wives by handwritten note, before putting a bullet through his own head in the cloakroom of the Sherry-Netherland Hotel.

But he did leave behind a wealth of knowledge about the art of speculation. His exploits (and cautionary tales of woe) have educated, influenced and inspired every generation of trader since Reminiscences was first published in 1923.

In my opinion, some of the most useful bits of knowledge we get from the book concern Jesse’s discussion of timeframes and patience. Many traders, particularly rookies, approach the game with the idea that they’re supposed to be constantly doing something – in and out, with a trembling finger poised to click the mouse again and again. Consequently, they get on the treadmill of booking wins and losses without ever really moving the needle. They end up with tons of brokerage commissions and taxes to show for their efforts, but not much else.

Being a trader doesn’t mean one must always be executing a trade, just as being a house painter doesn’t mean that every surface needs an endless series of coats.

Many rookies are surprised to learn that Livermore, the idol of so many great traders, advocated a lower maintenance, higher patience approach as he matured. In his early days, Livermore was dependent on the short-term funding and scalping activity of the bucket shops. Once he graduated and had his own capital, he was able to lengthen position holding times and could even afford to do nothing for extended periods.

Here are nine surprising things Jesse Livermore said regarding excessive trading:

  • “Money is made by sitting, not trading.”
  • “It takes time to make money.”
  • “It was never my thinking that made the big money for me, it always was sitting.”
  • “Nobody can catch all the fluctuations.”
  • “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”
  • “Buy right, sit tight.”
  • “Men who can both be right and sit tight are uncommon.”
  • “Don’t give me timing, give me time.”

and finally, the most important thing: “There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

Jesse was a trader but he knew the value of staying with positions and sometimes not trading at all. Once he began to follow tips from others or trade when he should have abstained, all of his progress had come undone, and with it, his sanity.

We are fortunate to be able to learn from his mistakes and to sidestep the errors that eventually cost him everything.

Original article source at www.ritholtz.com.

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Posted in Trading 101, Trend Following
One comment on “The Jesse Livermore Trend Following Legacy
  1. DGDye says:

    In my mind, Jesse’s the greatest trader who ever lived.

    There may be those who manage other people’s money (OPM) who have made fortunes, but they are like poker players who play only when they have good cards: they will do well, but not great, except where they can leverage their mediocre successes through OPM. Jesse traded only his own account and made more money doing so than any trader in history, adapted for inflation.

    Jesse was the poker player who reads all the info at the table and decides the time is right to not play at all, or to go all-in. There are trends…and then there are TRENDS. Jesse knew the difference.

    Sure, he had personal failings, but his essential approach was sound enough that I and thousands of traders owe him an enormous debt for what he left us. Nobody has had a greater influence on the degree of independence I have been able to achieve than Jesse Livermore.

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