We have written a number of research notes for GuruFocus on the insights and ideas of Jesse Livermore, the "Great Bear of Wall Street." Our most recent foray into Livermore’s advice was met by a challenge from one reader who claimed that Livermore, as a self-described speculator, had no place in a value investing forum.
In this note, we will take a closer look at Livermore’s views of speculation versus investment and see whether – perhaps – he deserves a place in value investors’ hearts despite his tendency toward technical trading.
What is speculation?
For Livermore, speculation had a very particular meaning:
“Speculation is correct anticipation of coming events and the best anticipation is that of the psychological effect that certain expected news will have upon the mind of the public.”
Furthmore, Livermore was convinced the psychological predictability of the market was the direct result of the largely immutable character of the human personality and that, throughout human history, people’s thoughts and actions have been driven by the same impulses: “greed, fear, ignorance and hope.”
This reading of market psychology may not be perfect, but it speaks volumes about macro behavior in the marketplace – both in Livermore’s time and ours. Markets behave irrationally and erratically, but also predictably to a degree.
For Livermore, there is one thing speculation is not:
“Speculation is a business, not a gamble.”
Gambling is about chance, which means giving into the psychology of geed, fear and hope. Speculation, on the other hand, is about understanding these impulses and exploiting the inefficiencies they create.
What is investing?
Livermore had a rather jaded view of those who considered themselves investors:
“Money lost by speculators is a microscopical fraction when compared with the money lost by investors…The investors are the big gamblers.”
That statement is liable to give any value investor a fit. But Livermore had even more to say on the matter:
“There are no investments. There is only speculation.”
For Livermore, investing meant putting one’s money in stocks one deems undervalued in order to reap long-term capital gains and dividends. In the era in which he operated, reporting rules were far laxer and it was much easier for misrepresentation and fudged numbers to get past even sophisticated analysts. Today, investors can rest somewhat easier, but it is still important to consider the macro environment and to exploit irrationalities when they emerge.
Can speculation and investment co-exist?
We would not agree with Livermore that all investing is really just speculation. However, we would agree that any investment, no matter how secure, must have a speculative element embedded within it.
When we are operating in a hot market like the one we have at present, where it seems every asset class wants to test a new all-time high, it can be very hard to find real value anywhere. Even if it is there, it could get dinged by an inevitable correction all the same. A dynamic and nimble approach in such times can make sense and not simply be ignored by value players.
Indeed, playing macro trends is not, and should not be, antithetical to the value investor.
