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What You Can Learn From the Demise of Jesse Livermore

Famed trader Jesse Livermore saw trades as "right" or "wrong." Should you do the same?


Jesse Livermore, perhaps the greatest speculator of all time, died on November 28, 1940.  It’s easy to picture Livermore, sitting near the bar in the Sherry-Netherland Hotel.  He ate lunch there regularly and sometimes stopped-by for cocktails after work.  It’s a typical evening.  He’s been there for an hour already.  The waitress approaches, asks him if he needs anything.  No, he’s fine: that will be all for him.  He smiles strangely, stands up, closes his leather notebook, and walks silently to the cloakroom.  It takes him awhile to locate his coat.  After he does, he drops the leather notebook into a pocket.  Then he turns around and sits down on a stool.  He unbuttons his vest; takes a deep breath.  Lifting his arm, he pauses momentarily, and then shoots himself in the head.  And that’s it: Jesse Livermore is dead.

In the notebook, he had left an eight-page suicide note to his wife.  He was her fifth husband.  Curiously, her previous four husbands had also killed themselves.  Just as perplexing— at the press conference, the police actually read from the suicide note.  The gist of it was that he was a failure.  In the Crash of 1929, he had amassed a fortune of $100 million.  By 1934, all that was left of that fortune was $5 million in annuities.  Still a considerable amount of purchasing power, but there was no trading capital left, and the Board of Trade had suspended his membership.  He wasn’t happy after that, although in his last few years, he did write a book about how to trade stocks.  In those final years, he was clinically depressed.

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So what happened to Jesse Livermore?  How did the greatest speculator of all time squander a $100 million bankroll, and why did he kill himself?  Let’s leave that last question unanswered.  It isn’t our place to interpret his final moments, and besides, for our purposes, we’re more interested in explaining how he squandered his trading capital.  This is, after all (or at least will be) a series on trading.  In these articles, we will mostly confine ourselves to identifying good entry points for short-term futures trades, but we will also cover broader topics:  What are the principles behind our trading methods?  Which statistics should you use when back-testing historical data?  And for starters, we’ll even take a stab at identifying our goal as speculators.  In other words, as speculators, what are we trying to accomplish?

Let’s get this out of the way now.  At its core, speculating is no different from gambling.  The math is the same and the mindset required for success in each is the same.  Perhaps the only difference between the two is the public policy response to each.  For our purposes, we will focus primarily on speculating, and especially on trading, but I want you to understand that you should approach trading as if you are playing poker.  In other words, imagine that you are starting with a stack of chips, and that your goal is to grow the stack, to walk away from the table with a bigger bankroll than you had when you first sat down.  You can leave the table anytime, and you can come back as many times as you want, but you must submit to the fact that the only way to measure success and failure is by counting the chips in your stack.  Of course this is obvious, perhaps even stupid, but the fact of the matter is that even the best speculators sometimes lose sight of this truth.  Jesse Livermore himself, the very best of all time, was practically blind to it, and this unfortunate flaw in his trading style ultimately led to his demise.

Who am I to make such a judgment?  Well, I’m no Jesse Livermore, but every time I read about him, I am struck by the fact that he always framed his ideas in terms of right and wrong.  From his perspective, winning trades proved him right, and losing trades proved him wrong.  This is a fatal mistake to make because whether you are right or wrong, either one will elicit a strong emotional response.  Being right brings feelings of euphoria, and those feelings can be highly addicting.  And in large doses, being wrong can cause despair.  Obviously, that’s bad, but what’s worse from a speculator’s perspective is that being wrong also causes cognitive dissonance, which can be paralyzing.  Jesse Livermore always said that if he could have just followed his trading rules, he would have never squandered his trading capital.  But he couldn’t help himself.  He was incapable of following his trading rules during losing streaks.  And I believe that this tragic flaw in his trading style existed precisely because he saw himself as being right when he won and wrong when he lost.  That is too great of an emotional burden for any of us to bear, especially if we are trading over short-term time frames.  Short-term trading requires you to watch the markets constantly, and if your identity is at stake with every price fluctuation, you will suffer gravely.  Listen.  Disavow your successes and renounce your failures.  To thrive as a speculator, you must understand one thing: winning and losing are worth nothing outside of the game.  They have no moral significance, and are meaningless once you get up from the table.  Remember this, and you will thrive.

Ryan Deming is the managing partner of Monterosso Investments, an NFA-member and CFTC-registered commodity trading advisor (CTA) specializing in short-term quantitative trading strategies.


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