Jesse Livermore was a larger‐than‐life, full‐blooded character who happened to embody every great trading maxim of the time.

—Paul Tudor Jones

“Buy low, sell high.”

“Nobody ever went broke taking a profit.”

“Buy when there's blood in the streets.”

We often use these axioms to justify why we bought, sold, or held onto an investment. The problem with rules of thumb, specifically when it comes to investing, is that they mask complexity. There are far too many variables and crosscurrents pushing and pulling on the price of a security to boil everything down to a cute little phrase. Doing this can lead to systematic biases, blind spots and bad decisions that are repeated again and again. Consider the following example from Daniel Kahneman's Thinking, Fast and Slow:

Steve is very shy and withdrawn, invariably helpful but with little interest in people or in the world of reality. A meek and tidy soul, he has a need for order and structure, and a passion for detail. Is Steve more likely to be a librarian or a farmer?

The resemblance of Steve's personality to that of a stereotypical librarian strikes everyone immediately, but equally relevant statistical considerations are almost always ignored…. Because there are so many more farmers, it is almost certain that more “meek and tidy” souls will be found on tractors than at library information desks. However, we found that participants in our experiments ignored the relevant statistical facts and relied exclusively on resemblance. We proposed that they used resemblance as a simplifying heuristic (roughly, a rule of thumb) to make a difficult judgment. The reliance on the heuristic caused predictable biases (systematic errors) in their predictions.¹

Think about how this sort of thinking manifests itself in investing. There are so many variables that you almost have to use shortcuts and sayings. And nobody's words or sayings are repeated more often than Jesse Livermore. For example: “Speculation is as old as the hills. Whatever happened in the stock market today has happened before and will happen again.” And: “They said there are two sides to everything. But there is only one side to the stock market; and it's not the bull side or the bear side, but the right side.”

If you're a trader, concerned primarily with being on the right side, keeping things simple can be overwhelming. Where are stocks going and which direction are they coming from? Are they being led higher (lower) by a narrowing group of stocks, or is there broad participation? How bullish (bearish) are investors? Is my own portfolio keeping me from answering this objectively? The list goes on and on. And while it's true that simplifying things generally leads to better decisions, it's not true that every situation can be condensed into a saying. No investor is more emblematic of the dangers of heuristics than Jesse Livermore, who made and lost several fortunes, and each time came away with beautifully elegant analysis.

Jesse Livermore is the most famous, maybe the first famous, market speculator. The lesson that investors should learn from Livermore is how dangerous rules of thumb can be. If you catch yourself saying “buy when there is blood in the streets,” it's a good idea to remember that the man who basically invented market phrases couldn't even stick to them. Buy low, sell high sounds great, and the idea is, but like many things, it's easy to say, hard to do.

Jesse Livermore, or JL, as his friends knew him, was born and raised on a farm in Acton, Massachusetts, in 1877. At 14, he left home for the big city—Boston—where he quickly got a job at Paine Webber as a board boy, earning $6 a week.

While he was learning about the market, young Livermore kept a journal, recording fictional trades. After 18 months of preparation, he visited a bucket shop, which were places where investors, mostly amateurs, could trade. His first purchase was Chicago, Burlington and Quincy Railroad, and with a $10 investment, he netted $3.12 in just two days.² He was immediately successful, and by 17, he built up a bankroll of $1,200. He had tasted the spoils of success and wanted more of it. He decided to leave Paine Webber and pursue speculating full time.

Bucket shops were used to traders leaving with empty pockets, and the traders who made money did not do so for long without the bosses taking notice. He became a victim of his own success, and before long, he was persona non grata in every bucket shop in Boston.

Livermore accumulated a bankroll and a few years of experience when he was forced to leave Boston if he wanted to continue trading. He already suffered his first big loss, which would become a recurring theme throughout his life.

Livermore left Boston for New York in 1900 when he was 23 years old. The same day he arrived, he walked into the offices of the brokerage house, Harris, Hutton & Company, run by 25‐year‐old Edward Hutton, who would later go on to found E.F. Hutton.³ Hutton and Livermore immediately hit it off. JL deposited his $2,500 and was extended another $22,500 of credit, allowing him to drop $25,000 into the market.

Stocks were acting very favorable and on the right side of the tape, Livermore made $50,000 in less than a week. But the difference between amateur and professional trading, which he would soon learn, is like the difference between driving a racecar simulator and getting behind the wheel of a Porsche 917.

In a bucket shop, the ticker price was the price which shares were bought and sold. But it was not the actual price on the stock exchange floor. The world of the bucket shop revolved around the ticker price rather than the reality of the floor price. On the real stock exchange, the ticker was only the communication medium, and the real price being quoted on the floor exchange could be very different.⁴

In May 1901, JL would experience his first large loss as a professional speculator, this time from the short side. Shorting is the opposite of buying, and this suited Livermore, a natural skeptic, perfectly. Rather than buy low, sell high, the short seller is attempting to sell high, buy back low and pocket the difference.

On a Monday before the market opened, Livermore put in orders to short 1,000 shares of U.S. Steel at $100 and 1,000 shares of Santa Fe Railroad at $80. He had used up his entire capital and was levered 4:1. In other words, the margin for error was paper‐thin. His orders weren't filled at $100 and $80, but instead at $85 and $65, which is where he intended to cover! (Close his short position.) And when the market went against him, he couldn't get out fast enough and the leverage buried him. JL lost $50,000 in just a few hours. At 23, he was broke. In fact, he was worse than broke, he actually owed his employers $500.

He realized what was going on, that the lessons and experience he took from the bucket shops didn't necessarily translate to professional trading. “The tape always spoke ancient history to me, as far as my system of trading went, and I didn't realize it.”⁵

Livermore was an excellent client for the firm and Harris, Hutton offered to credit his account $1,000, but JL didn't accept their offer. He knew he wasn't ready yet to play in the big leagues so he decided to return to the amateurs, where he knew he could win.

The problem was that all of the bucket shops in New York had closed, and he wasn't welcome at any in Boston. So he went to St. Louis where nobody could spot him. Livermore slid right back into his old ways and made $2,800 in just two days. But on his third day, as he tried to make an order, he was told the boss wanted to see him. “Horace Kent,” the name he gave, was figured out to be the infamous “Boy Plunger,” Jesse Livermore.⁶

Out of options, he returned to New York, repaid his $500 debt, and was left with $2,000 to trade.

“The training of a stock trader is like a medical education. The physician had to spend long years learning.”⁷ Over the next few years, Livermore paid his dues, putting in the time, getting an education and building a bankroll. At 28, he had accumulated $100,000 but hadn't yet had his first big score.

While he was vacationing in Palm Beach, for no reason other than a hunch, he decided to sell 1,000 shares short of Union Pacific. Not satisfied, he went back and sold another 1,000 shares, and then another 1,000 shares, and by the end of the day, was short 3,000 shares and down $7,500.

The next morning he woke up and sold another 2,000 shares. Having built up a large position, he decided it was time to head back to New York where he could better monitor his positions.

Twenty‐five hundred miles away, an earthquake hit San Francisco, lasting 42 seconds and shaking the ground over a distance of 296 miles. Three hundred seventy‐five people were killed, and 277,000 others were left homeless within the first week. Livermore was convinced that this would break the market in his favor, but the market didn't seem to mind. So, Livermore doubled his position, shorting another 5,000 shares at first, and then he decided to go for broke, doubling his position again. He called this patience “sitting” and attributed it to his success, despite being a difficult strategy to master. His sitting paid off big time when on Friday, April 20, the market finally cracked. On Saturday, he covered his entire stake, making $250,000, over $6 million in today's dollars. Jesse Livermore was a rich man.

He decided to sit back for a while and enjoy his first big score. But he couldn't help himself and was back in the market before no time, again jumping in on the short side. After several big losses, he quickly watched 90% of his recent windfall evaporate. As usual, he was very clearheaded in his analysis. “I had made a mistake. But where? I was bearish in a bear market. That was wise, and I had sold stocks short. That was proper. But I had sold them too soon, and that was costly. My position was right, but my play was wrong.”⁸

Livermore quickly rebounded, as he was known to do, and over the next few months, shorting into rallies, he made back everything he lost and then some, accumulating a bankroll of $750,000.

In 1907, Augustus and Otto Heinze, along with Charles Morse, tried to corner United Copper (gain control of the stock). Their attempt failed, which sent the shares crashing down from $60 to $10 within a few days. It forced all three financiers into bankruptcy. They borrowed a lot of money from trust companies in their attempt to corner the market, and when they went bust, a run on the banks followed, which triggered a panic.

When the collapse arrived, Livermore was short and on paper had gains of $1,000,000. But there was no liquidity and certainly nobody to buy his shares, and he wasn't confident that he would ever collect his profits. But when JP Morgan came in and provided the market with liquidity and confidence, he covered his shorts and made a fortune.

By the end of 1907, and before his 30th birthday, Livermore was worth $3 million. But once again, not content to rest on his laurels, he decided to take his commodity trading to the next level. In 1908, he moved to Chicago to trade commodities full time. His first play was in cotton, where he accumulated a huge position, 140,000 bales, and earned almost $2 million. This earned him legendary status and a new nickname, the Cotton King.

By the middle of 1908, fresh off a huge score, he returned to New York, with $5 million in his bank account.

His success in cotton attracted Teddy Price, one of the most famous and well‐regarded cotton speculators in the world. Price told JL he wanted to partner with him; the idea was he would supply the pertinent fundamental information and JL would trade it. Livermore quickly shot down this idea.

While Livermore was not interested in a partnership, he didn't mind developing a friendship, and the two became very close. They were vacationing together in Palm Beach, and JL was captivated and seduced by all that Price knew about the world of commodities. But Livermore was a tape reader, and fundamental factors like the size and the quality of the crop were of little importance to him. But Price's knowledge was so sharp and so seductive that it infected Livermore's brain. JL was bearish on cotton, and Price was on the other side. Convinced he couldn't have known more than Price, JL covered his shorts and even started buying. He quickly accumulated 160,000 bales of cotton.

While he was buying cotton, he was also long wheat, which showed a nice profit. Disregarding his own rules, the ones that he spent years developing, he sold his winner and added to his loser. “Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.”

This one hurt. He had made a mistake that was so obvious in real time and especially in hindsight. “It seems incredible that knowing the game as well as I did, and with an experience of twelve or fourteen years of speculating in stocks and commodities, I did precisely the wrong thing.”

To add insult to injury, his “partner” Price double‐crossed him. He went short cotton while Livermore kept buying. At the end, JL was carrying 440,000 bales, worth in excess of $25 million. He got crushed, losing $4.5 million.

Livermore once said, “A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don't believe in tips. If I buy stocks on Smith's tip. I must sell those stocks on Smith's tip…. No sir, nobody can make big money on what someone else tells him to do.” This time he was really disgusted with himself, for it wasn't just being on the wrong side of the trade or having the market turn against him, this time he was directly responsible for his blunder. He violated one of the first rules of trading that he ever learned.

In 1909, he was wiped out completely. He hit a cold streak, and everything he touched turned into a loser:

I kept trading – and losing. I persisted in thinking that the stock market must make money for me in the end. But the only end in sight was the end of my resources.

Livermore caught a break when he received an offer from a brokerage house to trade with a line of $25,000. The Boy Plunger had a reputation as an aggressive short seller, and the brokerage wanted people to know he was trading there, so that their big clients wouldn't be suspected of dumping large blocks of stock.

He quickly turned that $25,000 into $125,000, but the good times, as was becoming routine, were short‐lived. When he tried to sell short 8,000 shares of Baltimore, Chesapeake & Atlantic, the senior broker called him into his office and said, “Jesse, don't do anything in Chesapeake & Atlantic just now. That was a bad play of yours, selling eight thousand short. I covered it for you this morning in London and went long.”⁹ This went on for months, and the broker kept buying more railroad stock under Jesse's name. He finally realized that he was being used, that one of the senior broker's clients was dying and had a lot of rail stock to sell. And it was bought by Livermore as the prices kept going lower and lower.

For the second time, Livermore had been taken for a ride, and this time, he was simply unable to get out from under the dark cloud. Over the next few years, he accumulated debts of over $1 million, which he wasn't able to repay. At 38 years old, he declared bankruptcy.

Determined to jump back in with a clean slate, Livermore needed a lifeline, a loan of some sort, but he could not incur any fresh debt according to the details of his bankruptcy. He decided to go back to the broker who had fleeced him six years earlier. He was turned down, but was told, when you see something you like, you can buy 500 shares. He watched the market and waited for the perfect opportunity. He bought Bethlehem Steel, and in just two days, he earned $38,000. Markets were acting favorably and he quickly racked up a $200,000 roll.

Stocks exploded higher in World War I, and 1915 was the best year ever for the Dow, gaining 82%. Stocks doubled in less than two years, and he was once again on the right side, bullish in a bull market. A year shy of his 40th birthday, Jesse Livermore was back.

Once the war ended in November 1918, he switched from trading stocks to trading commodities. He set up a whole formal operation and was on top of the world, earning $3 million a year through 1923, and by the end of the year, he had accumulated 20 million bucks. During the roaring, 1920s, he was a cautious bear more than an optimistic bull. He started shorting as early as 1927, just putting out some feelers and taking small losses along the way.

By the fall of 1929, Livermore built up his biggest short position ever, $450 million spread across 100 stocks. And he was about to receive the biggest payday of his entire life. From October 25 through November 13, the Dow crashed 32%. In those 11 days, the Dow fell 5% seven times. Livermore covered all of his shorts and was worth $100 million, equivalent to $1.4 billion in today's dollars. He was one of the richest people in the world.

This would be the height of his powers.

The stock market finally bottomed in July 1932. The crash left nothing unscathed, the stock market was worth just 11% of what it was three years ago. When the bottom arrived, the rubber band had been stretched so far that stocks experienced the greatest snapback bounce ever, even to this day. Over the next 42 days, the Dow gained 93%, but this time, Livermore was on the wrong side. He got crushed. And after covering his shorts, he made his final mistake, going long at the top. That bounce would prove to be of the “dead cat” variety, and stocks came crashing back down, losing nearly 40% from September 1932 through February 1933. Everything he had made in the crash was gone.

Being on the bear side when he should have been on the bull side and then flipping to the bull side when he should have stayed on the bear side cost him everything. By 1934, he was broke again, and owed $5 million to 30 creditors.

He declared bankruptcy for the second time, and over the next few years, he barely scraped by. He was having a real hard time adjusting to the rules imposed by the newly created Securities and Exchange Commission. Many of his tricks and strategies were now illegal and came with hefty punishment.

Livermore once reflected:

All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable “Don'ts.” I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn't be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself.¹⁰

But in 1939 his final attempt at a comeback fell short, he was unable to pull off another miracle, and he was out of opportunities. On November 29, 1940, he took his own life. Court records show that his assets, listed at $107,047, were several hundred thousand dollars less than his liabilities, which totaled $463,517.

It is somewhat ironic that the most quoted trader of all time exhibited such poor risk management. All the sayings and lessons he learned didn't save him from blowing up four times. The real lesson that Livermore learned, too late in life, was that:

If a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool‐play line.¹¹

Investing is inherently an act of uncertainty, so we can never say to ourselves, “I'll never let that happen again!” Sure, there are very specific mistakes that you won't repeat, like buying a triple‐levered inverse ETF and holding it for three months. That's something you do one time and never repeat. But like Livermore said, the mistake family is too large to avoid all of them. And no amount of market quotes will change the fact that losing money is a part of investing. Risk management is a part of investing. Repeating mistakes is part of investing. It's all part of investing.

If you focus on avoiding unforced errors, you won't need to rely on cute market phrases that sound really great but only provide a false sense of security.