Risk & Return - The Jesse Livermore Story

Jesse Lauriston Livermore was a famed American stock trader known for his huge successes and devastating failures in the early 20th century. Starting as a "chalkboard boy" in a Boston brokerage, he became hugely wealthy as a trader first in "bucket shops" and then on the exchange in New York.  Livermore made millions in the Panic of 1907, the roaring 20's and in the 1929 market crash. His experiences are chronicled in the classic "Reminiscences of a Stock Operator" by Edwin Lefèvre.

Despite his legendary wins, Livermore went bankrupt numerous times and faced personal challenges, culminating in his tragic suicide in 1940. His legacy endures as an influential figure in financial history.

Books:
Jesse Livermore – The Man Who Sold America Short by Tom Rubython: https://amzn.to/3vWOrCA
Jesse Livermore – Worlds Greatest Stock Trader by Richard Smitten: https://amzn.to/47QO3Tm
Jesse Livermore – Speculator King by Paul Sarnoff: https://amzn.to/47R9jIv
Reminiscences of a Stock Operator by Edwin Lefèvre: https://amzn.to/496874U
How to Trade in Stocks by Jesse Livermore: https://amzn.to/4baKom1

Online Sources
New York Times Time Machine: https://timesmachine.nytimes.com/browser
Time Magazine Archives: https://content.time.com/time/subscriber/article/0,33009,847596-2,00.html
Wikipedia: https://en.wikipedia.org/wiki/Jesse_Livermore

Patrick's Books:
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Transcript

Risk & Return - The Jesse Livermore Story
If you ask investors to name the greatest trader in modern history, it’s very likely that they’ll bring up the name Jesse Livermore first. Livermore is a true legend in the world of finance and investing, celebrated as a trading prodigy with an uncanny ability to trade stocks, bonds commodities and whatever else moved.  He is quoted every day on trading floors around the world. According to Amazon, Reminiscences of a Stock Operator – a fictionalized biography based on the life and experiences of Jesse Livermore - is the most widely read, highly recommended investment book ever written.  Newly hired traders at investment banks and hedge funds are often told to read the book before starting their first day at work.

It might surprise you to hear that the story most people know, the one immortalized in "Reminiscences of a Stock Operator," does not accurately reflect Livermore's life?

Let’s dig a little deeper today, to uncover the stark differences between the myth and the man - exploring the untold chapters that have mostly gone forgotten.

Reminiscences is a great book – I’ve probably read it three or four times. It’s filled with wisdom about market psychology, patience, discipline, adaptability and (maybe most importantly) learning from your own mistakes.  The book warns about market manipulation, overtrading, following the crowd and relying on tips from others.

Livermore's life was unfortunately filled with great tragedy, he experienced extreme financial swings, struggled with mental health issues, isolation stemming from his financial success, and a lonely existence. Despite achieving significant wealth at times through his remarkable trading abilities, Livermore faced multiple bankruptcies and bouts of depression, leading to a strained personal life. The culmination of his tragic narrative came in 1940 when, at the age of 63, he took his own life. Livermore's story serves as both a testament to his financial acumen and a cautionary tale about the emotional toll that the stock market can exact on an individual, leading to the enduring fascination with his life and legacy.

From the winter of 1928 till the early spring of 1929 Jesse Livermore was a bull in a raging bull market.  The more the market rose, the more stocks that he would buy.  He borrowed money using his trading profits as collateral to maximize his exposure to the rising stock market. The type of stocks that had historically traded at 8 to 12 times earnings were at this point trading at 40-60 times earnings, and Livermore was borrowing more and more money to buy them.  He was already a very wealthy man, and the rising stock market was just making him wealthier. The public had arrived in the market in full force in the late 1920’s and many were (like Livermore) borrowing money to buy stocks. The high-tech stocks of the day - radio companies like RCA and Victor Talking Machine - were leading the charge upwards.  By the summer of 1929 Livermore – unlike the general public sold all of his positions and began making a list of the hottest stocks that he now believed had run too far. His instincts told him the market had topped, but to Livermore, timing was everything and the timing was not yet right.  

In the early summer he took a few small, short positions, but quickly covered when the market rose – proving him wrong.  In late summer his short positions began working and so he began to add to them. He watched the prices change on the chalk board in his office, updated constantly by a crew of chalk board boys wearing headphones with a direct connection to the exchange.  They worked away in silence updating prices on the board adding secret symbols from time to time that only Livermore understood.  

Livermore had told his friends that he could read the price action on the chalk board the way a conductor could read sheet music and at this point, to Livermore, the music was building to a wild crescendo like you might expect at the end of a symphony.  Livermore had been building this huge short position entirely in secret using over 100 different brokers to hide his tracks.

On October 24th the storm that had been building struck in full fury. The market fell 11% at the opening bell as huge blocks of stock from newly panicked investors hit the exchange floor. The biggest stocks of the day were being dumped at prices that shocked traders who had only known a rising market. RCA, which had recently traded at 110 dollars a share was now being dumped at 26 dollars a share. By noon more than eight million shares of stock had traded and all previous volume records on the exchange had been shattered. The ticker tape machines in brokerage offices around the country were unable to keep up with the volume were and running hours behind. Most investors had absolutely no idea what price their stocks were trading at, till hours after the market had closed.

The next day, the market rose slightly. Newspaper headlines announced that New York bankers’ had worked together to halt the decline and that Richard Whitney, the vice president of the Stock Exchange had bought twenty million dollars’ worth of stock expressing his confidence in the market.

On Monday the 28th, the Dow Jones fell 12.8% and on October 29th – known as Black Tuesday – the market fell an additional 11.7%.  The stock market had lost more than a third of its value in the 1929 crash. An entire years’ worth of stock market gains had been wiped out in a few days.  The crash which preceded the great depression, lived on in infamy for both investors and bystanders, haunting the memories of an entire generation, but for Jesse Livermore this was his greatest period of trading ever. He later told his friends that he had taken no joy in the misery of others who were losing money, and that while he had become fabulously wealthy over those few days he felt hollow and empty inside.

Livermore barely left his office during the week of the crash and when he arrived home to his house in Long Island, he was shocked to find it abandoned and everything in disarray.  Paintings had been taken from the walls, the silver cutlery had all disappeared, his wife’s jewelry was missing from the safe, and most worryingly, his wife and children were nowhere to be found. He and his driver searched the massive house eventually finding his family hiding in the servants’ quarters. His wife had tears in her eyes, as she knew the market had collapsed and that many of the nation's biggest investors were ruined. 

She knew that Jesse had been under a lot of stress lately and had a lot of market exposure and because she hadn’t heard from him in days, she assumed that he had lost everything. She had instructed the servants to hide as many valuables as possible, afraid, that they'd be lost in the bankruptcy that was sure to follow.

Livermore explained that while things had changed for them, this time they had changed for the better.  The Livermore’s were now wealthy beyond their wildest dreams. 

Jesse Livermore made a hundred million dollars over the week of the 1929 crash, equivalent to around 1.8 billion dollars today, he was – at this point - one of the richest men in the world.

Things had not started out like this for Jesse Livermore. He was born in Shrewsbury Massachusetts in 1877 to a poor but hard-working family. His father lost his farm when Jesse was a small child and the family had to move in to his grandparents home while his father saved up to buy another small farm, this time in Acton Massachusetts.

Jesse was said to be a quiet, bookish boy who learned to read and write by the time he was three and a half years old. He excelled at mathematics at school and managed to do three years of arithmetic schoolwork in just one year. 

Jesse ran away from home with his mother’s blessing at the age of 14 after his father took him out of school so that he could help out on the family farm. His mother knew that he wasn’t cut out for farming and to give him a start, sent him on his way with all of the money she'd saved up. It came to around five dollars. According to his biographer, he repaid her with a thousand dollars less than a year later, the equivalent of thirty-six thousand dollars in today’s money. He said that paying off his debts was ingrained in him from the very start, and it is something he always tried to do his whole life long, no matter how long it took.

Livermore had gone to Boston and found a job as a chalkboard boy at Paine Webber – a Boston based brokerage firm. He would have known nothing of the stock market at this time, and simply walked into every business he passed once he arrived in the city in search of a job. Someone just happened to be out sick that day and Jesse was asked if he could step in to help out. Prices would come through to the office on the ticker tape machine and be called out, often by a customer. The chalk board boys would write the prices up on a blackboard for the customers to see, constantly updating them throughout the day. 

Livermore found himself in his element at Paine Weber, he loved talking to customers and brokers, hearing the news about big companies and big speculators and listening to theories on how money was made and lost. 

Livermore was fascinated to see that the price movements that came across the tape, rarely reflected what the brokers, customers or newspapers said, and he began to notice that the majority of stock traders seemed to act randomly and almost all lost money. 

Working on the chalkboard he grew fascinated by the way market prices developed, he started to notice that the price usually moved before the news on a stock came out.  He felt that there might be repeating patterns in the numbers and began keeping a notebook filled with his observations and theories.  He kept detailed notes on which of his ideas worked out and which ones failed.  It is claimed that he had a great memory and could memorize big chunks of the daily price data which he would write out in his notebook at the end of each day, digging through the data searching for patterns in the way market prices moved.

Livermore initially began collecting this data and noting down his market theories purely because he was interested in markets and how they worked.  He was also interested in the psychology of the customers and the brokers, fascinated by the way they passed tips and rumors along which rarely appeared to work. At the time he believed that you needed to be very wealthy – like the customers at Paine Weber - to participate in markets. A few months into his job however, during one of his lunch breaks, another chalk board boy, introduced him to the less reputable end of the industry, the bucket shops. 

A “bucket shop” was like a cross between a brokerage house and a bookmaker. The bucket shops dealt in small, even single-share stock orders, and charged customers a slight premium over the price on the exchange. Boston had ten or twelve of these bucket shops when Livermore first arrived there, half of which were owned by Arnold Rothstein the notorious New York based crime boss. 

For those with small accounts, who couldn’t meet the minimum account sizes of the big brokerage firms, bucket shops were the only game in town. The bucket shops didn’t buy and sell the actual shares on behalf of their customers like the brokerage firms did, instead they just took bets on whether a stock price would rise or fall. Customers were just betting on price changes, and the trades were never sent to the exchange. It felt a lot like buying shares, but the prices at which shares were traded were based entirely on the ticker tape quotes which were often quite different to prices on the floor of the exchange.

Bucket shops would allow their customers to trade with small amounts of money and lots of leverage.  Customers often put up as little as 1% of the price of the shares they were buying and the bucket shop would usually just take the other side of the bet. Traders could bet on a share price and a betting shop-type slip would be issued which could be cashed in at any time. The bet would stay in place as long as the customer had enough margin in their account, but if a customer bought using full margin and the stock price fell by one per cent or more, the bet would be wiped out and the house got to keep the money. The house tended to win more than half of the time and thus was profitable.  There were also all sorts of dirty tricks they could pull on their customers too.

If a bucket shop knew that a lot of their customers had positions in a particular stock, they would often enter a big sell trade on the exchange causing the price on the ticker tape to fall just enough to exhaust their clients’ margins.  Such activity would be illegal today but there were no rules against it at the time.  

Livermore decided to test out his trading ideas at the bucket shops to see if his theories about prices were right. He placed his first trade at the age of 15, buying shares of Burlington Railway on margin for $5 before quickly selling them making a quick return on his money of 62 percent.  At least that is the story that is told.

Livermore was quickly making more money trading than he was earning at Paine Weber, so quit his job and took up trading full time. By the age of 16 Livermore is said to have made made more than a quarter of a million dollars in today's money trading in the bucket shops in Boston.

The bucket shops thrived because anyone who consistently won was quickly banned, leaving only the losers who enjoyed gambling and fast turnover. One by one the bucket shops began to ban Livermore because of the amount of money he was making. He began wearing disguises so that he could continue trading, but a sixteen year old boy making massive trades – even with a false moustache - tends to get noticed.

Around this time, he got the nickname “the boy plunger” – a nickname that would stick with him for life due to his youthful appearance and the size of his bets. He quickly found himself banned from every bucket shop in Boston. The fact that these businesses were owned and run by mobsters meant that he was taking a lot of risk, and it quickly became obvious that it was time to move on.  Livermore travelled to bucket shops around the country for a while, and finally at the age of 20 decided to move to New York City and take a shot at the biggest casino of all - The New York Stock Exchange.

Livermore arrived in New York City in 1897.  He had a sizeable stake to trade for a man his age, but he had recently suffered significant losses – down about 75% from his peak in the lead up to his move. He said that he didn’t blame the markets or his trading counterparties for his losses. His belief was that the market was always right, and he had simply been wrong. He used to say that a trader getting angry at the markets was like a gambler getting angry at a pack of cards.  Instead of grumbling, he studied his mistakes with the goal of profiting from them. 

When Livermore arrived in New York, he met his first wife Nettie Jordan who he would marry within a few weeks of meeting.  He was well liked by the other traders in New York, but after less than a year he suffered a long streak of losses such that he wiped himself out entirely and ended up owing his broker money. He asked his new wife to pawn some of the jewelry he had bought her over the prior year so that he could pay off his debts and start trading again. She was having none of that, took the jewelry and walked out on him.  

 Livermore had to take some time off to reflect on his mistakes.  He worked out that his winning approach only worked at the bucket shops but was failing horribly once the trades were going to the exchange. There were a few reasons for this.  At the bucket shops he was able to buy and sell stocks at the price shown on the ticker tape, while on the exchange the market price had often already moved by the time he got his fills.  To make things worse, his big trades were causing the market price to move both when he bought and when he sold stocks. Another big factor was that in the bucket shops his losing trades had been automatically closed out when a stock price moved enough against him, but when he was trading stocks on the exchange, his losses could really mount up.  

 Livermore had two big problems to solve.  He needed to work out a new system for trading stocks that took these factors into account and he needed enough money to start trading again.  He borrowed $1000 from the broker, who he was already in debt to and travelled to St Louis to trade in bucket shops where he was not yet known.  After four days he had been banned from every bucket shop in St Louis, but he had enough money to pay off his debts and had $3,800 dollars in winnings to trade with.  He found a bucket shop in Hoboken on his way back to New York where before being recognized he managed to turn that $3,800 into $10,000.  He returned to New York somewhat humbled and ready to rework his system so that it could handle the slippage of trading actual stocks on the New York Stock Exchange.

 Livermore spent months going through the detailed notes he had kept on his trades studying them to better understand his mistakes.  He later told his sons that the only way you get a real education in life is through the torturous process of examining each and every one of your mistakes. Livermore decided that there were numerous pitfalls on the road to successful speculation, and he acknowledged that he would likely fall into each and every one of them, but his goal was to avoid repeating the same mistakes too often if that could be avoided.

 Livermore worked out that he had been trading far too frequently and that commissions and bid ask spreads had been making his brokers rich while grinding him down to zero.  With his new approach he would need to trade a lot less frequently and try to capture much bigger moves. He had made mistakes taking stock market tips and that had to end too.  Why would anyone be offering him valuable tips – he reasoned - if they could trade on that information and keep all of the profits for themselves. Not only would he no longer listen to other people’s tips but he began to keep his trades to himself too, there was no benefit in telling people what he was doing. 

 In Livermore’s new system he would focus on the general market direction first before thinking about individual stocks. He would aim to follow the line of least resistance.  There was no point in shorting the worst stocks he could find if he expected the overall market to rise. Why sail into the wind?  He acknowledged that he would often be wrong and developed what he described as a probing approach to trading where he would build positions slowly over time. If it was too easy to buy a stock it meant there was a big seller out there.  If the market wasn’t moving as he expected, it simply meant that he was wrong, and he should close out his position.  Now, on the other hand, if the market moved in his favor, it meant that he was right, and he should increase his size.  Many of these ideas have been incorporated into trend following systems used by traders to this day – with varying degrees of success.

 In 1901, the stock market was in a frenzy, the first truly frenzied market that Livermore had experienced.  He turned his ten thousand dollar stake into $50,000, mostly due to one big successful trade in Northern Pacific stock.  Over the next few years Livermore stuck to his system slowly refining it. The improvements all came from his process of examining and analyzing his mistakes.  He lived a good life, during that period trading when he felt he had opportunities, and relaxing and having fun when he felt he had no edge in the market. Taking time off when there were no obvious opportunities was an important part of his system.

 In 1906 he went and broke all of his rules and made an absolute fortune.

 Livermore was on a break in Atlantic City in the spring of 1906, and he dropped into a brokerage house with a friend to see what was going on in the markets.  He noticed that the market was unusually strong, so based on his system it was a good time to buy stocks. For some reason – which he could never explain - he had a strange urge to go short – which involves selling borrowed stock which he hoped to buy back at a lower price later on.  This is a risky trading strategy that seeks to profit from a price decline. Union Pacific was the stock he chose to sell short that April, and when he lost money on the trade he doubled down and sold even more.  By the end of the day, he had such a big short position that he decided he would need to cut his vacation short, return to New York, to manage his relationship with his brokers and apply his full focus to his trading.  He was using a lot of leverage and didn’t want to get shaken out of his trade.

 As Livermore was sleeping in New York, with a big position that violated every one of his trading rules the earth under San Fransisco began to tremble. The San Francisco earthquake of 1906 was felt from southern Oregon to south of Los Angeles and inland as far as central Nevada. Not only did buildings collapse, but fires broke out in San Francisco that lasted for several days. The event is remembered today as the deadliest earthquake in the history of the United States. The next morning the market fell only a few points on the news of this natural disaster.  Livermore went to his broker, negotiated more margin and doubled up his already huge position.  On the third day, the market eventually reacted and collapsed.  Union Pacific was one of the hardest hit stocks and Livermore made $250 thousand dollars in profit that day, the equivalent of eight and a half million dollars in today’s money.

 It is very hard to know what to make of a story like this.  So much is made of Livermore’s trading systems and his rationality, but one of the biggest wins of his entire career appears to have been based on luck and irrational risk taking.  This story highlights the difficulty of evaluating the skill of any trader – differentiating between luck and judgement.  Livermore never claimed to have predicted the earthquake and having broken every one of his rules on this trade, it’s not obvious that there is anything replicable about it.  People do love stories like this, as they like the idea of a trader with great instincts who appears to almost have a magic like ability to predict future events.  The real take away here, is possibly that sometimes a bit of luck can take you a long way.

Livermore went on to cover his short position near the market low and started buying Union Pacific stock, feeling that it had fallen too much. His old friend EF Hutton, whose firm Livermore brokered through saw the buy orders coming in and called Livermore to warn him that the pool that ran the stock were slipping it to him, knowing that there was more bad news to come.  Livermore thanked Hutton for the information and sold all of the stock he had just bought.  The next day Union Pacific announced a ten percent dividend and the stock rallied sharply. Livermore was not angry or upset at Hutton, he instead viewed the situation as part of his education. He had listened to a tip, and it had cost him money.

With that trade out of the way, he took a vacation first to Palm Beach and then to Paris, only returning to New York in 1907.  When he returned, he noticed a lot of weakness in the market and began selling stocks short once again, right before the panic of 1907.

The panic of 1907 was a major economic collapse triggered by a number of big events, including the San Francisco earthquake a year earlier – I made an entire video on the topic a few months ago. 

The earthquake in San Francisco and the subsequent reconstruction efforts had caused an outflow of gold from the United States. This was a big problem as the dollar was backed by gold at the time, so it caused a significant contraction in the money supply. The weak and fragmented US banking system of the time, coupled with excessive speculation and overexpansion of credit in the stock and real estate markets, created an environment ripe for instability. A failed attempt by a group of speculators to corner the market on the stock of the United Copper Company led to a series of bank runs which culminated in the collapse of the Knickerbocker Trust Company in October 1907. 

The banks were almost entirely out of cash and hoarding what was left, the Federal Reserve didn’t yet exist, meaning that there was no lender of last resort. Brokerage firms were going bust and the only money that was available was being offered at 100 -150% interest. The US financial system was in meltdown, Livermore was short stocks and sticking to his system involved selling more and more stock short as the market fell.

 Not only were the banks and brokers failing, but the City of New York itself was out of cash, and if they couldn’t quickly raise money by November 1st, the city would be insolvent. As the market fell, Livermore had his best day trading yet, making a million dollars in a single day- around thirty-three million dollars in today’s money.

With no central bank to fall back on, leading bankers (most notably J.P. Morgan) stepped in and put their own money on the line to bail out the US banking system.

JP Morgan was a man who Livermore hugely admired. Morgan is said to have sent a messenger to Livermore’s office to request that he sell no more stock – for the good of the markets and the country. Livermore agreed that it was the best course action for both him and the financial system and began covering his short positions right away.  His buying supported the markets and was noticed by other big investors who followed his example.

What a life – he is reported to have later told his sons, broke three times before the age of 30, and at the age of 31 sharing power with JP Morgan for a day.  Taking a few points out of stocks in the bucket shops had helped him build his stake but catching these big waves had made him a fortune.

Livermore really started living the high life at this time. He bought a 200ft steam yacht The Anita Venetian which he kept in Palm Beach, he had his own luxuriously outfitted private railcar that he would travel with and a beautiful apartment on Riverside Drive in New York. 

He kept a suite of rooms at the famous breakers hotel in palm beach and became lifelong friends with Edward Bradley, the notorious gambler who owned Bradleys Beach Club - the longest running illegal casino in the history of the United States.  Livermore loved beautiful women, and the newspapers were filled with scandals of the women he was seen out with, often dancers from the Ziegfeld Follies Broadway shows.

In 1908 Livermore began trading commodities, starting first with wheat and oats. He claimed to know nothing whatsoever about agriculture or farming and traded commodities purely based on price action. 

On two occasions, Livermore cornered the Chicago cotton market. The first time was when he saw that one of his peers, Percy “The Cotton King” Thomas had failed to corner the cotton market and went broke in the process.

The liquidation of Percy’s trades had caused the price of cotton to tank. Livermore noticed the opportunity and bought 120,000 bales of cotton. His aggressive buying pushed the price back up from the lows, but he found himself stuck in a large and illiquid trade.

He knew that exiting his position would weigh on the price and so used a now-illegal market manipulation tactic called “painting the tape” to draw other buyers in - providing him with exit liquidity. Day after day he threw big buy orders at the market right as it was closing in Chicago.  The closing price was what made it into the newspapers every day.  He hoped the high prices being printed in Chicago would attract buyers in London and that this would hopefully lead to a buying frenzy amongst speculators. His plan was to unload his position into the very frenzy he had created. 

As the price was moving higher and higher, the New York World newspaper printed a headline that read “July Cotton Cornered by Livermore.” He later claimed that it was not him who had leaked the story to the press, but the article caused the price of cotton to soar as soon as the market opened, allowing Livermore to exit his position at a tidy profit. 

After some success trading commodities, Livermore found himself sitting next to Percy Thomas – the recently bankrupted Cotton King at Bradleys Beach Club – the illegal casino in Palm Beach. The two men became fast friends and over time Thomas explained the workings of the commodities markets to Livermore and convinced him to join him in a long trade based on crop information that he had collected through a network of spies he had cultivated who reported to him on crop conditions.  

Thomas taught Livermore everything that was to be known about cotton – the history of the crop, the names of the big planters and the cotton mills who bought up the crop for processing.  Livermore loved how everything worked, but still believed that this type of information was useless, as the market prices already reflected the information that was circulating and instead moved based on forward looking information that even experts could not know about.  He felt that all he needed to know was there in the price data and that the news reports had no value and were quite possibly misinformation designed to lead you in the wrong direction. Thomas was said to be a great talker and it wasn’t long before Livermore had fallen under his spell. He reasoned that Thomas was more often right than wrong, and decided that there might well be something valuable missing from his style of trading. Despite his best instincts warning him to go the other way, Livermore agreed to join Thomas in the trade.

No sooner had the pair bought than Cotton began to sink in price. Instead of taking a quick loss, as his system instructed him to do, Livermore attempted to support the price by buying more.

Livermore lost ninety percent of the fortune he had built up on this trade and was down to $300,000 by the time he walked away.  The episode burned into his memory and explains why later in life he would refuse to discuss markets with friends and would ask people to keep their trades and tips to themselves.  Bernard Baruch, one of the great traders of the day – known as “the Lone Wolf of Wall Street” had a very similar policy, he was reported to have asked his friends and brokers, “Please don’t tell me anything that is happening to a stock I am invested in. I don’t want my judgment affected by anything you might say…”

Livermore had to sell his Yacht, and his New York Apartment in the wake of these huge losses.  He needed money, and he needed it fast.  He traded furiously to make back his losses, trying to force the market to give him the money he needed right away. Livermore wiped himself out and found himself a million dollars in debt to his brokers.  He suffered a complete emotional breakdown at this point, falling into a deep depression. The more he studied his trades the more disgusted he became with himself.  It was 1910 and he entered the new decade a wiser but much poorer man.

Livermore is reported to have later told his son, “The hope of forcing the stock market to pay your bills is one of the most prolific sources of loss on Wall Street”

Livermore went from broker to broker over the next few years, he was able to convince some of them to give him a line of credit but continued to trade badly. He felt weighed down by his debts, and believed that he couldn’t think clearly while debt hung over him.  He finally gave up and filed for bankruptcy protection towards the end of 1914 when the stock market was closed due to the outbreak of war in Europe.

Livermore is said to have visited his creditors one by one before filing for bankruptcy to explain his actions and to promise them he would pay them back one day if he could, many are reported to have refused to file their debtor claims with the bankruptcy court – I’m not sure how true that is…

When the markets eventually reopened and with his debts forgiven by the courts, Livermore began trading again in much smaller size than before, but with success.  In 1917 he made what he described as one of his proudest walks down Wall Street where he stopped at the offices of each of his creditors and paid off his bankruptcy debts in full.

Livermore was 40 years old at this point and decided to make a few changes to how he lived. Once he regained some of his wealth he locked up half a million dollars in a trust fund, where he could only receive interest but never touch the principal, he did this to ensure that he would never be poor again.

Around this time Livermore met Dorothy Wendt, who was introduced to him by Flo Ziegfield, the creator of the Ziegfield Follies, the hottest show on Broadway that featured scantily clad women, carrying ostrich feather fans parading up and down elaborate staircases. Girls with fans on staircases was a big thing back then – there was no internet…

Less than a year later Livermore rushed through a divorce with his first wife Nettie, as while she had walked out on him eighteen years earlier, they had never gotten divorced.  He gave Nettie everything she asked for in the divorce, feeling there was no amount of money he couldn’t make back in the markets.  A year later he married Dorothy who was 18 years old while he was 41, he felt it was now time to settle down and start a family.

In 1919 his first son Jesse Livermore junior was born and his second son Paul was born in 1922.  The book Reminisces of a Stock Operator by Edwin Lefevre was published in 1923, a thinly disguised biography of Jesse Livermore which made him even more famous. Livermore moved out of New York City that year, buying a large house set on 13 acres on Long Island sound.  It had 29 rooms and 12 bathrooms, there was a large staff which included a full time live in barber to shave Livermore and trim his hair every day.  Dorothy filled the home with the finest antique furniture money could buy.

Dorothy loved parties and organized them as often as she could.  Livermore loved that he never had to organize anything, but he preferred that the parties be restricted to the weekend when the markets were closed.  

Dorothy had one of the staff brew beer in the basement of the property during the prohibition years and would set out in a convoy of Jesse’s Rolls Royce cars to deliver weekly supplies to all of their neighbors.  By all reports, Dorothy was a lot of fun.

Livermore had gained a passion for collecting guns and had a firing range and sporting clays course built on the property. He, Dorothy and their two kids would compete in shooting targets for fun.  He is said to have kept over 400 guns on the property.  

For now, Jesse and Dorothy were living the high life in one of the finest homes in New York, Jesse kept a yacht moored outside for his fishing trips and would commute to the city to trade the markets in his chauffeur driven Rolls Royce.  His chauffeur regularly tipped all of the traffic signal operators between his home and the city (which were manually operated at the time) meaning that when they saw his Rolls Royce coming they gave him a green signal. 

This was possibly the happiest period of Livermore’s life, but tragedy was soon to strike and Jesse would learn that in life just like in markets the unexpected can appear out of nowhere...

As Livermore’s wealth grew, he began to attract the wrong sort of attention, in 1925 a plot to kidnap his children was foiled by the police, but the idea that such a thing could happen deeply distressed Jesse and Dorothy.  In 1927, the Livermore’s suffered a home invasion when the notorious criminal Boston Billy – aided by Livermore’s ex chauffeur held the Livermore’s and their house guests at gunpoint, making off with $100,000 in jewelry.  These events left Livermore depressed and deeply concerned for the safety of his loved ones.  

Dorothy at first appeared to take the whole event in her stride, she even talked the burglars into leaving some of her favorite jewelry behind and persuaded them to leave quietly so that the children wouldn’t be woken up. Despite her calm demeanor at the time, Dorothy’s drinking appears to have intensified and became a noticeable problem to those around her at this time.

Jesse’s trading in the 1929 crash catapulted him to a new level of wealth at a time when the country had fallen into an economic depression.  He hated how he was villainized in the press.  Dorothy’s drinking and spending was getting increasingly out of control.  At one point she fired all of the house staff and replaced them with French employees, so that the children would learn to speak French.  This was reversed a week later when neither she nor Jesse could communicate with the newly hired staff.  She is said to have bought a cow, which she brought into the house, so that Jesse could have fresh milk in his coffee.  This turned out to be less of a convenience than she possibly expected it to be.

The Livermore children were having difficulty at school and getting in trouble, Jesse didn’t provide a great example.  He reportedly told his son that he wouldn’t need to read or write as an adult, as he would have a secretary to do jobs like that for him. He was constantly cheating on Dorothy with showgirls and actresses, he kept mistresses in apartments in New York and some of these stories filtered back to Dorothy, which only made her drinking worse.

In 1932 Dorothy asked for quick divorce and married a younger man the day the papers were signed. She got four million dollars, the house and the kids in the divorce settlement. 

Jesse married Harriet Metz a year later.  This was Harriet’s fifth marriage, all four of her previous husbands had committed suicide, which may have been a bit of a red flag…

Dorothy moved to California with her new husband (a prohibition officer) and the two kids, mostly abandoning the grand home in New York. She was terrible with money, as she had married Jesse at the age of eighteen and had spent as freely as she had wanted to.  She occasionally returned to New York and allowed her dogs to destroy the valuable furniture and rugs at Evermore.  At one point the foundation on the waterfront side of the house had sunk due to erosion, and rather than have the house repaired, she had her butler cut two legs on each piece of furniture so that it would sit level.  The furniture in the house had been considered one of the finest collections of antiques in the United States at the time, and was now all ruined.  When her property taxes came due on the home, she refused to pay them and allowed the state to auction the property.  The house, furnishings and Rolls Royce limousines which together were worth around three and a half million dollars were sold at auction for $250,000 in the depths of the great depression. Dorothy squandered her divorce settlement in no time at all.

On May 30th 1933 Congress passed the Securities and Exchange act and the SEC was formed a year later in 1934. The new rules outlawed many of the tricks Livermore had used to make money in markets.  The details of how he lost the huge fortune he had accumulated just five years earlier are not clear, but in 1934 he declared bankruptcy once again, listing assets of $84 thousand dollars and debts of two and a half million dollars. He was suspended as a member of the Chicago Board of Trade on March 7, 1934.  There were a number of lawsuits against him, including one from a Russian mistress that he had kept in New York – that didn’t sit well with his new wife. He was said to be in a deep depression at the time, refusing to leave the home or meet with friends.

On Thanksgiving Day 1935 Jesse Livermore Junior – Jesse’s sixteen year old son was reported to have downed a quart of whiskey at one of his mother’s parties in California. Dorothy – who was also drunk told him that she would rather see him dead than drinking. He fetched a shotgun from the small guesthouse on the property handed it to his mother and said “here – go ahead and shoot me – I dare you”. One of the party guests took the gun away to calm things down and left the mother and son arguing in another room.  A few moments later a shot rang out in the house. 

Guests walked into the room to find Jesse Livermore Jr. lying in a pool of blood. On the floor beside him his mother was clutching a second gun, sobbing: "I've shot my son. He dared me to."

An ambulance took Jesse Junior to the hospital and the police took Dorothy in for questioning, Jesse Jr. narrowly survived, and Dorothy was later was cleared of charges – based on her lawyers argument that she had been so drunk that she couldn’t be held responsible for her actions.

Jesse Livermore never made back his fortune.  It seems that his trading strategies no longer worked and it is reported that he was deeply depressed showing little interest in anything. He possibly lived off the income from the trust fund he had put in place earlier or his wife’s wealth.  In 1940 he published a book called “how To Trade in Stocks” which didn’t sell very well, as public interest in the stock market was very low at the time.  

On November 27th 1940, Livermore and his wife Nina were at The Stork Club in New York.  The house photographer asked if he could take a photo.  “No problem”, Livermore is alleged to have said, “but it is the last photo you will take of me.  Tomorrow I’m going away for a long long time”.  His wife is reported to have appeared confused by the comment. The next day he stopped for a cocktail at the bar of the Sherry Netherland Hotel, he then walked into the cloakroom and shot himself dead.  An eight page suicide note addressed to his wife Nina was found in his coat pocket.  He was 63 years old.

In 1941 his estate was settled.  It was valued at ten thousand dollars in assets and 361 thousand dollars in liabilities.  There was no mention of the trust fund that he was said to have set aside.

Jesse Livermore junior – his son - went on to live a troubled life of alcohol abuse, violence, womanizing and gambling. He committed suicide in 1976 while out on bail for assault and attempted murder of a police officer.  His son Jesse Livermore III also died by suicide in 2006.

Jesse Livermore’s other son Paul went on to be an actor.  He died in 2002 at the age of 79.

There are many lessons that we can take from the life of Jesse Livermore, some good and some bad, but most people know his story from the book Reminisces of a Stock operator which was partially fiction and written in 1923, before the peak of his success, and the great tragedies that would follow.

Livermore led a truly amazing life, transforming himself from being a teenage runaway to one of the wealthiest men in the world, entirely self-educated.  His book “how to trade in Stocks” is in the public domain today, and anyone can read it to better understand how Livermore thought about markets.  I would caution people not to follow his rules blindly, they can easily be tested on market data with today’s technologies, and I’m sure if Livermore was alive today he wouldn’t be following someone else’s rules blindly the way some people follow his rules today. 

It is worth noting that he did make himself very wealthy at times, but often lost money just as fast as he made it, some of his biggest successes came at points when he went entirely against his stated trading rules.

In researching this piece, I relied on three Jesse Livermore biographies that I have linked to in the video description and to a lesser extent Reminisces of a Stock Operator – which is well worth a read.  I also relied on some online news archives that I will link to too.

Thanks for tuning in to this week’s podcast, a special thanks to my Patreon supporters without whom I couldn’t make these longer podcasts.  Have a great week and talk to you again soon, bye.