In the archives of the greatest investors of all time, Jesse Livermore is rarely mentioned, but that does not mean we cannot learn from his experiences.
Livermore was more of a trader than an investor. Born in 1877, he died by suicide in November 1940.
Several peaks and troughs defined his career. He made a tremendous fortune betting on movements in stock prices. He also lost an immense fortune betting on changes in stock prices.
At the peak of the trader's career in 1929, he was worth an estimated $100 million, which is around $1.5 billion in today's money. What's even more impressive about the career of this legendary stock market operator is the fact that he never used anyone else's money. He used his own capital to trade on the market, which caused plenty of uncertainty in his life.
This has to be one of the most important lessons we can learn from Livermore's life. He traded on his own account but also borrowed money on margin to increase returns. As a result of this high-risk strategy, he was wiped out on several occasions. The simple lesson here is, never invest or trade with more money than you can afford.
Eventually, Livermore decided to use some of his money at one of his peaks to buy an annuity, which would provide him with an income when trading losses proved too much. This turned out to be a sensible decision and is an excellent example of why it is essential to have a regular income stream you can depend on as an investor or trader.
We never know what the market is going to do, and we need to be able to separate our day-to-day lives from that of the stock market. The best way to do that is to have another income stream that is not dependent on equity prices.
Livermore employed a handful of strict trading rules. These rules helped guide him through uncertain markets, although on the occasions he abandoned them, the trader ended up incurring big losses.
One of these rules was to never meet a margin call but close the position instead. Translated for long term investors, this could mean that it is sensible to sell a position when the facts change. If your original investment thesis no longer makes sense, it could be better to sell up and move on.
Livermore also advised fellow traders against following too many stocks. He followed a small number of companies and waited for the right opportunity to buy. This is very similar to Warren Buffett (Trades, Portfolio)'s belief that every investor should stay within their circle of competence.
Another common belief Livermore and Buffett seemed to share is the idea that investors and traders should wait for the right opportunity to strike. As Livermore once explained, patience leads to "the big money."
Livermore followed these rules most of the time. When he didn't, it proved disastrous. This is a warning for traders and investors. Having a set of rules or even a checklist to help you find individual investments and stay away from bad companies can be a crucial part of the investment process.
Straying from this list or buying assets you don't understand can be a quick way to lose a lot of money. Livermore was successful when he followed his rules, but lost millions when he ignored them. I'm sure he's not the only trader/investor who's fallen into this trap.
Livermore's most important lesson was to have a plan and stick to it. This is just as important today as it was 80 years ago.
Disclosure: The author owns no share mentioned.
Read more here:
- What We Can Learn from Carl Icahn's Wall Street Career
- Some Thoughts on Why Warren Buffett Missed the Market Crash
- Berkshire Hathaway: How Much Is the Company Really Worth?
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