Jesse Livermore was a trend following trader who developed a strict set of rules. His trading career began in 1892, at age 15, and by the time he was 20 he had accumulated his first $10,000 – equivalent to more than $250,000 in today’s money. This article tries to answer the question, what would Jessie Livermore be buying if he were alive today?
Who was Jesse Livermore & how did he amass his fortune?
In 1891, at age 14, Livermore began working as quotation-board boy in a stockbrokerage office. His excellent mental arithmetic and ability to remember numbers made him perfect for the job and within a year he began trading in Boston’s bucket shops (betting shops).
Livermore quickly became adept at reading the tape, i.e. monitoring the movements of the market and interpreting the signals it gave, and at age 16 he began trading full-time. By the time he was 20 he had accumulated his first $10,000 – equivalent to more than $250,000 in today’s money – and at age 21 he moved to New York to trade through real stockbrokers.
Essentially a trend follower, Livermore would study what he called “general conditions” so as to be able to “anticipate probabilities”. Once he was confident that a trend was in place (either up or down), he would then take his position and sit tight until the trend came to an end.
As we learn in Reminiscences of a Stock Operator, “In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions”.
Livermore tells the story of old Mr Partridge, an old trader he encountered in the offices of A. R. Fullerton & Co. Partridge was different from the rest of the crowd in that he never bragged of his winnings and never volunteered advice or asked for any. However, whenever a customer asked him what they should do his answer would always be the same, saying “Well this is a bull market you know”.
As Livermore explains once he has learnt the lesson for himself, what old Mr Partridge really meant to tell them was that, “the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend”.
All the time the general market favoured a continuation of the trend, he would just sit tight. He was never in a hurry to take profits. “I have learned to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary”.
In Reminiscences of a Stock Operator Livermore cautions the reader that “stocks are never too high for you to begin buying or too low to begin selling”. He also remarks that, “I never want to buy stocks too cheap or too easily,” and this was a hallmark of his strategy. He would never buy a stock that had dropped 20% on the premise that it was now better value.
As with today’s trend following traders, Livermore didn’t care why a stock moved, only that it did. In the book, How to Trade in Stocks, Jesse Livermore discussed “the folly of trying to find a good reason why you should buy or sell a given stock”.
“If you wait until you have the reason given, you will have missed the opportunity of acting at the proper time. The only reason an investor or speculator should ever want to have pointed out to him is the action of the market itself… Whenever the market does not act right or in the way it should – that is reason enough for you to change your opinion and change it immediately”.
Depending on how you measure it, Livermore’s fortune peaked between $1.1 and $14 billion in today’s money, and many of the techniques he revealed are still used today.
So what would Livermore be buying if he were alive today?
Let’s start with general conditions. The US stock market made a significant low back in March 2009 and since then it has been in an uptrend.
On a short-term basis (as the chart below shows) the S&P 500 index made a low of 1,343.35 on 16 November and has since begun to move higher. General conditions therefore, look good.
A 1 year chart of the S&P 500 index (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Livermore liked to play stocks that were breaking out to new highs (or new lows if he was going short) after a period of consolidation. His preference was for the initial move to be confirmed by an expansion in trading volume and for the price to generally move in one direction (up or down) for a few days.
A normal “reaction”, or correction, should then occur (accompanied by a contraction in volume) during which the price moved in the opposite direction. Within a day or two of the correction, volume should once again expand and the price trend should resume.
One company that Livermore would surely be long today, is J&J Snack Foods Corp. As the chart below shows, the company’s stock spent more than 3 months in a tight sideways consolidation, however in the last few weeks the stock has broken out to new all-time highs on expanding volume.
A 6 month chart of J&J Snack Foods Corp. (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
J&J Snack Foods is just the type of setup that Livermore looked for, and getting in early after the breakout was critical. “I never benefited much from a move if I did not get in at somewhere near the beginning of the move. And the reason is that I missed the backlog of profit which is very necessary to provide the courage and patience to sit through a move until the end comes – and to stay through any minor reactions or rallies which were bound to occur from time to time before the movement had completed its course” he said.
The bottom line
As Livermore points out, “there is nothing new in Wall Street… Whatever happens in the stock market to-day has happened before and will happen again”, and because of that his wisdom and trading methods still apply today.
“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on”. Jesse Livermore, Reminiscences of a Stock Operator.