Monday, January 11, 2021

The Jesse Livermore "System" -- apparently not a system at all

Cleaning files, we came across this rumination from 40 years ago:

Focus on the Independent Investor:
Jesse Livermore 1877-1940
The perfect system

Jesse Lauriston Livermore— known also, in his day, as "The Boy Plunger,' "The Speculator King," and "The Great Bear" - spent his entire adult life trying to develop a system to beat the stock market. In the end he failed, but there were times when it seemed that he could do no wrong.

Born on a rural Massachusetts dirt farm in the summer of 1877, Livermore hitched a ride with a passing farmer to run away from home and an unsympathetic father when he was 14. Having nowhere in particular to go, young Jesse went where he was taken, which turned out to be Milk Street in Boston, across from the old offices of Paine Webber. There his career began as a board boy, taking prices from the tape and writing them on blackboards so that passersby could see. There he worked for the first and only paid wages he would ever earn.

Jesse worked to learn. He watched the customers making trades, he listened to the brokers' conversations, he studied the tape. Eventually, he came to have a feeling for what went on in the investment world.

Armed with this small knowledge and the savings he had accumulated, Livermore quit to take on Boston's infamous "bucket shops." No stock trading actually occurred in those barely legal institutions; they were in reality only gambling parlors where customers bet that the stocks of their choice would rise in price. Most players lost, but so good was Livermore's luck that he was soon banned from every bucket shop in Boston.

No problem, he thought as he tallied his little fortune. The Big Boys on Wall Street are next for me.

One way and another, though, the Big Boys stripped Livermore of everything he owned. The experience mortified him and left him with a powerful desire to get even. There must be a way, some system, he fantasized, to beat the market and its celebrated barons once and for all. All he needed was a system and the cash to prove that it worked. So over the next few years, he traveled further and further west, visiting and making a killing in bucket shops where he was still a stranger. All the while, his notion was developing into an obsession.

In 1900, Livermore returned to New York with $50,000, claiming finally to understand "the essential difference between betting on price fluctuations and anticipating advances and declines." The short sale was fundamental to his system. In this transaction, a speculator agrees to sell a stock that he does not yet own at a set price on a future "delivery date' He makes the contract with confidence, even before buying the stock, if he believes that the price per share will soon fall below the price that his buyer has agreed to pay him on the delivery date. If the short-seller is right, he makes a profit: the difference between his purchase price and the contract price, multiplied by however many shares are involved. If the price rises after the contract is made, the speculator loses the difference between the purchase and contract prices.

For a while it seemed that Livermore had found the perfect system. Soon he owned a respectable house and was taking vacations abroad. Returning from one of those vacations in 1901, Livermore noticed that stocks had advanced to new levels. Without learning the reasons for the upsurge, he recklessly started a flurry of short selling. The market continued to rise, and shortly he was wiped out.

In 1906, after more long years in bucket shops, Livermore began shorting Union Pacific stock. The price rose steadily, but he believed that his system would rescue him from danger and make him even richer, at the expense of Wall Street's barons. Unknown to him, a group of traders and brokers was prepared to demand delivery and finally rid themselves of the Boy Plunger. But on the morning of April 18, 1906, a famous earthquake destroyed most of San Francisco, including the headquarters of its greatest railroad - the Union Pacific. Livermore had made another killing. He attributed it all to his system.

Jesse Livermore would rise and fall many times in his life, but never would he develop the perfect system. The closest he ever came to his dream of systematically beating the market was provided by the quite unscientific and ultimately flawed mechanism of a black cat. The Wall Street Journal of November 30, 1940 quoted Livermore's friend Bernie Chipman, the cat's owner:

"The cat, an animal of easy friendship, was forever having kittens. Each time she had a litter, I wired Mr. Livermore and he reversed himself. The first time this happened, he was short. When begot my wire he covered - and made a cool million. Had he waited he would have been slaughtered by the bulls. Invariably, continued Chipman, "he made money every time the cat had kittens. And when I one day wired him the cat was dead - he fainted.'

From The Independent Investor, Spring 1981



Blogger's note:  Everything in context.  Einstein, similarly, failed to construct a Unified Field Theory to synthesize all his earth-shaking insights in the realm of physics.....

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