The two belonged to almost the same generation, and both witnessed the 1929 crash first hand. One became wiser and prospered as a result, and the other committed suicide.

I always considered Livermore the ultimate mythical figure in markets, and not Benjamin Graham. If I had one criticism of Practical Speculation, it would be the exclusion of Livermore as the man who decimated the most ill founded wisdom about markets. I contribute that to the fact that his method was simple enough for the high school drop out to understand and apply, as well as to his colorful lifestyle and womanizing.

Livermore’s work can be summarized in very few words. Buy when stocks are going up and always buy at market, and do the opposite with down trending stocks. It is mind boggling how any logical person can believe that such an easy to follow system would make money over the long term.

I believe I had the same copy of How to Trade in Stocks that Victor has, and actually went out of my way to program the formula in red and blue at the back of the book into a simple computer program, before I realized that what he calls natural reactions of six dollars and more, according to the formula, mean that you should sit through decreases that will wipe out any margin you could have. He neglected to use percentage points, so according to him a six dollar reaction on a hundred dollar stock should be dealt with the same way as on a four hundred dollar stock.

In brief it is totally inapplicable in this day and age where computers execute millions and millions of dollars worth of trades at the click of a mouse, and where even arbitrage opportunities became obsolete in consequence. Its applicability to today’s markets is questionable even if you are sensible enough to change the numbers into percentages and apply it to the thousands of stocks that are under the hundred dollar mark. I even question its applicability at the turn of the last century when it was believed that Livermore prospered just by using this simple formula.

Yet, seemingly very smart people idealize Livermore, but probably more for his life style — his Yachts, his mistresses, his cigars and his mansions.

I ended up selling the book to The C.E.O. of a brokerage firm for a few thousand dollars, it is a thin book of under 100 pages. Like Ben Green (not Ben Graham) I felt I made a very good trade given the useless content of the book, but left the new owner with the impression that he got a steal out of this little boy who probably does not even know who Livermore is.

Ben Green advises that you should never show anxiety to sell to the buyer. I dare say that unlike Livermore he would have never bought stocks at market.

Green also put a very high price on his horses to test the knowledge of the buyer. While Green’s techniques could be useful in today’s markets, some twists are appropriate if not necessary, as buyers now have more choices, and again at the click of a mouse can find out the prices of a product at a hundred different suppliers around the globe.

In fact today, sellers do the opposite and fake urgency and anxiety to sell a product, just to get the buyers foot in the door. Everything Must Go, be it due to bankruptcy, a new season’s merchandise, renovations, etc … Once the buyer gets into the store to take advantage of the seller’s urgency however, he/she finds out that the seller used Green’s second technique of setting the price too high to test the buyer’s real knowledge of a bargain.

GM. Nigel Davies responds:

My reading of Livermore is different.

When reading his two biographies it seemed to me that first and foremost he was an intuitive tape reader. What he was not was an educated man, so his attempts to systemise what he thought he was doing were pretty bad. Those looking for something similarly poorly organised and unscientific should take a look at Nimzowitsch’s My System or Hans Berliner’s The System. The latter in particular would seem to have little excuse as he is a professor of computer science at Carnegie Mellon University.

I would argue that given the size Livermore was trading he must have been rather remarkable to do as well as he did, and this may well be indicative of a substantial market edge, at least in his heyday. And inevitably he got wiped out when he was wrong, a simple case of wild money management.

Larry Williams comments:

I would argue that he was a market manipulator … the Reminiscences [Full PDF] book was not exclusively the life and times of Jesse, it was a composite that first appeared in the Saturday Evening Post.

The real life and times of the man links him to Joe Kennedy and lots of market “campaigns”. His personal life was a disaster — deep depressions, children shooting one another or their mother, I forget which.

His fortunes wane almost the instant the SEC came into power, but it is certainly a well written book that has captured the imagination of traders ever since.


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