In Jesse Livermore’s time, the stock market was similar to today’s – it was full of suckers losing their money (and all too often other people’s money too).
Livermore talked frequently about suckers. Several times he admits to actions that lost him a lot of money and which, with hindsight, he realized were the actions of a sucker.
The difference between Livermore and a real sucker, however, was that Livermore mostly admitted his mistakes and learned from them.
He recognized different grades of sucker:
First of all there’s the complete beginner who knows nothing about anything and is aware of his ignorance.
Second, and more dangerous, is the semi-sucker. The semi-sucker has read books about trading – usually written by yet higher grade suckers – but he does not realize that reading books is not the same as trading experience. This type of sucker can quote all sorts of wise sayings about the operations of the stock market. He does not lose money as quickly as the beginning sucker because he has learned some of the most rudimentary trading rules. Livermore said:
“It is this semi-sucker rather than the 100 percent article who is the real all-the-year-round support of the commission houses. He lasts about three and a half years on an average, as compared with a single season of from three to thirty weeks, which is the usual Wall Street life of a first offender. He knows all the don’ts that ever fell from the oracular lips of the old stagers-excepting the principal one, which is: Don’t be a sucker!”
Livermore The Sucker – Part 1
It was only after going broke twice and then making much less profit in a raging bull market than he would have expected to that Livermore realized he was trading like a sucker. He was losing his profit because he was trading every day for the sake of trading. This, he realized, made him a “Wall Street Fool”.
“Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose. There was the huge quotation board staring me in the face, and the ticker going on and people trading and watching their tickets turn into cash or into waste paper. Of course I let the craving for excitement get the better of my judgment.”
After he had learned to trade less, Jesse Livermore’s profits soared.
Livermore The Sucker – Part 2
Another occasion when Livermore was suckered was when he broke one of his cardinal rules – the rule that said he should think for himself rather than accepting tips from other people.
On this occasion he was steadily buying-up shares in Union Pacific when a much respected, and well-informed friend, Ed Harding, called him and told him that insiders were selling Union Pacific – and worse than that, they were selling to Livermore – Livermore was being suckered. The insiders were feeding him all the stock they could shift. Livermore’s own reading of the tape was that the stock price was rising due to real demand. He told this to Harding. Harding, his friend, responded:
“I got heart disease when your orders began to come in. For the love of Mike, don’t be a sucker. Get out! Right away. It’s liable to bust wide open any minute. I’ve done my duty. Good-bye!”
And he hung up.
Despite his doubts, Livermore decided to believe his friend. He sold his shares and then sold Union Pacific short at $162.
The next day Union Pacific declared a 10 percent dividend and the stock leapt to a new record high price. Livermore, realizing the information he had been given was wrong, bought Union Pacific back at $172 and $174 for a total loss of $40,000.
Livermore was philosophical about the loss. His own interpretation of the tape had been correct. Listening to a tip had been wrong. He did not hold a grudge against Ed Harding because he believed the incident had completed his education as a trader. In Livermore’s view, $40,000 was:
“A low price for a man to pay for not having the courage of his own convictions! It was a cheap lesson.”
Livermore The Sucker – Part 3
When Livermore lost much of his fortune in the cotton market he concluded that he had not just been a sucker, he had been a super-sucker. On this occasion he broke two of his cardinal rules. Firstly, he let someone else’s apparently brilliant analysis of a situation influence his trading decisions; then he increased his stake in a position that was showing him a loss while selling a position that was showing him a profit.
At the beginning of his involvement with cotton and wheat, Livermore had been bearish on cotton and bullish on wheat. Accordingly, he had gone short on cotton and he had gone long on wheat. On paper, he was in profit on both positions.
And then he met Percy Thomas. Percy Thomas had a fine reputation in commodities and he persuaded Livermore that his information on cotton was all wrong. Thomas had better information and that information said cotton was going to go up. Livermore said:
“Gradually, as I began to accept his facts and figures, I began to fear I had been basing my previous position on misinformation. Of course I could not feel that way and not cover. And once I had covered because Thomas made me think I was wrong, I simply had to go long. It is the way my mind works.”
Unfortunately, the price of cotton fell. Livermore sold his profitable position in wheat (a position which, had he held it, would have profited him by eight million dollars) to buy more cotton. Every day Livermore bought more cotton. In fact, he bought so much cotton that he was supporting an entire market into which the smart money was selling.
In the end, this incident did not wipe out Livermore’s fortune completely, but it lost him millions. After it, in dollars, he had fewer hundreds of thousands than he’d had in millions before it.
“To learn that a man can make foolish plays for no reason whatever was a valuable lesson. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.”
“It has always seemed to me, however, that I might have learned my lesson quite as well if the cost had been only one million. But Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill, knowing you have to pay it, no matter what the amount may be. Having learned what folly I was capable of I closed that particular incident. Percy Thomas went out of my life.”