Livermore's epic comeback: A lesson in stock trading

Last week we took you through ‘How Jesse Livermore beat the bucket shops’. This week we are talking about how Livermore made a comeback and relearned how to trade stocks.

When Livermore had returned to New York, paid back all he’d owed to Fullerton and the rest, and begun trading again, he was focused on one thing, that he had to learn how to trade the stock market and that this was a very different ball game from trading at the bucket shops. He had to relearn how to trade.

He had good spells, bad spells and indifferent spells, but this time he was not just breaking even, he was also making some money. He only had to understand that there was more to stock speculation than he had thought when he first went to New York.

In 1901, he was long on a thousand shares of North Pacific common. He held onto it, despite everyone in the office advising him otherwise. He grabbed the profit when the stock went to 110 and he was at 30 points of profit. His balance at the broker’s was now 50,000 dollars which was the most money he had ever made, and he had been playing the market from the age of 14. This was a great comeback for someone who had gone flat broke at that very office not so very long ago. He never looked back. The market was what he was destined for, and he played it to the hilt.

He made money, he lost money, he raked in thousands, he lost down to the point of becoming flat broke. He had now acquired a lifestyle that was difficult to maintain without money, and constantly kept needing to up his game.

In 1906, he was in Atlantic City for a spring break. Walking down the Boardwalk, he saw a branch office of Harding Brothers, he went in from force of habit. After all, he was on vacation and wasn’t doing much to pass him time. He checked the quotation board, noting the changes. When he saw the changes on Union Pacific, he felt that he should sell it and wrote an order to sell 1000 shares at market, then walked back and gave an order to sell another thousand.

The next day, when more market reports came in, he sold off five thousand shares, pushed his luck and sold 10,000 more. All he thought was that this was a god sent opportunity and he needed to encash it. The San Francisco earthquake took place. The entire city was wiped out. Livermore had made two hundred and fifty thousand dollars on his reading of the movement on Union Pacific.

He went to Saratoga Springs in the summer of 1906. It was to be a vacation but he kept his eye on the market. He saw Union Pacific look like it would go up. While the price was high, it seemed like it was being accumulated cleverly. As soon as he was certain of his supposition he began buying it at 160, 500 shares at a time. It kept getting stronger.

At the time, Ed Harding called him from New York and warned him that he was being played by those controlling the Union Pacific stock and that he should get out while he had the chance. While Livermore was convinced about his gut feel on the stock, he trusted Ed Harding and sold his long stocks and then sold four thousand shares short.

Unfortunately for him, the next day, the directors of the Union Pacific Company declared a 10 per cent dividend. The shares went to a new record high, and some traders made a fortune. It was a learning for Livermore, to learn to trust his instinct about a trade rather than relying on tips and insider news. He lost 40,000 dollars for not trusting his own reading of the share price movement. He bought four thousand shares and held them till the next morning. He then got out of the share, making up the 40,000 dollars he had lost, and 15,000 more.

Livermore considers that incident one of his greatest learnings, one that he says completed his education as a trader. He kept in mind the lessons learnt from this incident all his life. To pay heed to his own reading of the ticker and to follow his gut rather than go with any advice, no matter how well intentioned, he received from anyone else.

(To be continued in the next column.)

Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral