Mail Bag: What Do You Think of Jesse Livermore?
Here’s a question about one of the most famous financiers of the 20th century …
There is a maxim of which you are no doubt aware that retail investors quote Warren Buffett, while professional money masters quote Jesse Livermore. You never talk about Livermore and I would like to know your thoughts on his philosophy.
Jesse Livermore, arguably the greatest speculator of all time, was a terrible example who provides tremendous utility for learning what not to do with your portfolio. The boy who escaped from his father’s farm to build a fortune traded his way to $3 million in 1907, before being nearly wiped out, then to $100 million in 1929, before watching it disappear in the Great Depression. In 1940, having lost 95% of his fortune (again) and finding his Board of Trade membership suspended, the depressed author of a bestselling book on how to speculate with stocks went to the bar at the Sherry-Netherland Hotel in New York City, downed a couple of drinks and wrote a note to his wife, which said:
“My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie”1
Livermore then walked to the cloak room, sat on a stool, and proceeded to blow out his brains with a handgun.
When someone idolizes Jesse Livermore, it’s a red flag to me. I might smile, and nod my head, and have a perfectly pleasant conversation, but I grab my wallet tightly. Regardless of how great their numbers are at any given moment, Livermore’s acolytes should be viewed warily as his approach is simply not sustainable over long periods and Livermore himself came to regret them. (Though it was late, during his final depression, Jesse Livermore had his “come to Jesus” moment, when he declared upon examination of his career that, “It was never my thinking that made the big money for me, it was always the sitting,” which he also pithily summed up as, “Buy right, sit tight.” He lamented the wasted energy of obsessively studying stock charts and market fluctuations as it always led to ruin in the end, while the long-term owners of diversified empires kept getting richer, going about their lives.)
The type of speculation in which people who adore Livermore tend to engage is often naivety masquerading as sophistication. It subjects the capital holder to stupendous losses that can result in catastrophic declines in his standard of living; something that no wise person should be willing to accept once he or she has reached financial independence. As the saying goes, “you only have to get rich once”.
Putting that comfort at jeopardy for the sake of “more” is often a sign of emotional instability. Most of the time, it’s not hard to figure out what is really motivating the person if you listen to them speak. They may be talking about money, but what they really want is something else – more recognition, more fame, more excitement, a bigger gap between where they are now and the poverty they escaped as a child. These are very rarely the the Robert Woodruffs or J.M. Smuckers of the world, who patiently build quality businesses with dedication and purpose, who produce wealth by serving their fellow man useful products, who go home to happy family lives, who can sit quietly in their study at the end of the night and reflect contently on their many blessings as they share their dividend, interest, rents, and royalty income with their charities and churches.
Bernard Baruch Was a Better Example than Jesse Livermore
If you are going to study a speculator, someone like Bernard Baruch is a far better choice. He was wiser. He had a degree of discernment that Livermore did not. He also had the good sense to take money off the table once he had amassed it, adding funds to his permanent capital. In fact, he tried very hard to convince a young Benjamin Graham to give up the Graham-Newman Corporation and, instead, manage money for him exclusively. Ben refused because he felt a sense of loyalty to his existing stockholders and concluded making a very rich man richer was not a good use of his talents. Graham later criticized Baruch as he thought it immoral to isolate yourself without doing something productive with all that brain power, even if that meant operating a business.
If you’ve never read Livermore’s writings, they can be interesting provided you take the John Stuart Mill approach of “seeing that no scattered particles of important truth are buried and lost in the ruins of exploded error”. He did do some important work for the capital markets, identifying some basic principles that had not yet been codified.
In short, I don’t mention Livermore’s approach because I’m not particularly fond of strategies that have near 100% long-term failure rates. I like having money, spending money, and doing useful things. Why add unnecessary misery to my life? Why introduce even a small probability my family could lose what we worked so hard to build? Why give up the satisfaction of knowing that I am making money from real businesses, doing real work, in real communities, selling real products and services? I am more interested in making money by selling you a cheeseburger or a diamond watch in a free exchange than I am taking advantage of another investor.
Besides, the poet in me can’t help but find it amusing that there is no small amount of cosmic irony in that when people like Jesse Livermore are inevitably wiped out, as they nearly always are, it is the John D. Rockefellers and Benjamin Grahams of the world who buy up their lucrative assets at pennies on the dollar.
1. While there seems to be no indication of foul play, Livermore’s wife had been married four times before and all four of her earlier husbands had also committed suicide.