past repeats itself ONLY because of Human Nature remained same for aeons & so too Market Behaviour 1980s non - productive Wages- COST- Push Inflation replaced 1960s productive DEMAND- Pull Inflation after VIRGIN Event/s series Oil Shocks 2 in 1970s 1 in 1980s

 

BiPartisan Macro Economics Essay
Subject: 1929 Style Microcosm

 

I also believe that Teenage Credit Card Debt is potentially more destablising than Home Mortgages & badly needs a Limit Cap like Directors / CEOs Remuneration/s ; 

* above all else, favourable Trading outcomes require not only opportune Timing / Trading strategies in response to more Globalization & instantaneous Information Technology, but also Self - Discipline & Money Management ;

 

*  anticipate but never underestimate, impacts of Central Bank/s including Currencies, & " Government Intervention " ( could now be described as " Financial Socialism " to protect the broader Community ; then so be it ) : Fiscal &/or Monetary Policy decisions that can result in Trend REVERSALS ;
also governing ( cross ) Currencies Rates ( denominations & hedging ) which is a perceived, external Trade Indicator of the Health of individual Countries
( the internal Domestic Indicator of the Health of individual Countries is Interest Rates ) ;

 

in USA case, 12 ( District ) Central Banks ( because of the unique " Stand Alone " Banking System ; NOT Branch Banking ) making up the Federal Reserve, founded AFTER the 1907 Financial Crash which was more severe than 1929 ; this financial architecture or structure justifies the present day Government recent part Equity buy - ins of major USA Banking Institutions, similar to a Centrally Planned Economy, co - ordinated approach ;

 

How World Economic conditions have changed from 1907 / 1929 to the present day !
the Banking ( not Economic ) Masters of the day thought it was their sole duty to uphold the Currency ( not the Economy ) ;
a substantial number of Central " Bankers " today are trained & experienced, Economists who work in concert with Central Bankers from other Countries :

 

At the peak in 1928 - 29 unemployment was estimated to be 10.8 % an unusually high level for an upper turning point & characteristic of newly emerging, developing Nations of machine-producing ( or capital-goods ) Industrialised Economies :
It implies that there were some STRUCTURAL WEAKNESSES in the economy during this decade ;
This period was also an example of equilibrium in the circular flow at a level well below full employment.

 

consequently, during the Great Depression ( 1930 - 1933 ), there was HIGHER unemployment in the order of 20 - 30 %

 

***  forgot to repeat from my previous " Consumerism Vs Capitalism " Macro Economics Essay the premise that USA has ALWAYS been the World's most resilient dynamic Economy & is therefore a Market Giver NOT Taker, not only because of it's affluence size, but also due to it's FLEXIBLE Wages System ( that did not exist in Australia during the Great Depression & consequently suffered DOUBLE the Trough duration & 20 % more severity of unemployment )  *** ;
I think this is one of the primary reasons the rest of the World always pays a Premium for the USD $ & shares, as well as for it's " World Police " role since WWII with the sanction of the UN ;

 

( Approximately 25 % of the USA workforce was also unemployed at the lowest point in the Trough [ 1931 - 32 ] ;
similarly with Australia but for different economic maturity factors [ see Borrowings below ] : " the US economy had weakened in the 12 Months prior to the ( 1929 not 1907 ) great stock market crash " caused by unsound speculation in share buying, not based on additional Capital Formation & failed to generate increased output or productivity through legitimate capital investment activities ;
there had already been an oversupply of capital goods production and consequently the beginning of an INVENTORY Recession in early 1929 ).

 

In the 1925 - 29 period, approximately 50 % of public investment & 25 % of total Australian investment was supplied from overseas sources. The heavy overseas borrowing by public authorities during the 1920s was invested by governments in large - scale Public Works projects which did not at 1 st return any benefits to the economy as a whole. In 1928 payments amounted to 18.5 % of the value of Exports.
The consequence of heavy foreign capital borrowings during the 1920s was an increased interest burden which remained fixed in sterling ( British Pound ) for the most part whilst the Australian currency was devalued BY 30 % until stabilised against sterling in 1931 ; in terms of GOLD

 

*  but also Traders need to be flexible enough to evolve their own particular strategies & trading styles e.g. when the USA created the SEC in 1934 the character & personality of both the Commodities & Stock, Markets changed to a more regulated environment ;

 

It was not until AFTER the Great Depression that economists began to attempt to measure the state of national economic activity i.e. " Social Accounting ". Moreover, the tools of government economic control were forged less than 10 years AFTER the Great Depression under the economic strictures by the necessity of an economy on the eve of World War II ( when unemployment was still unacceptably high at 20 % ! ) ;
so began for the 1 st time, the National Economic Planning & coordination of efficient resource allocation.

 

*  " let Profits run " ( add to holdings by averaging ) ; " cut Losses " ( subtract from holdings immediately " take the 1 st loss " [ as opposed to the modern trailing Stop Losses ] ) ;
but wait until AFTER the desired Market CONFIRMATION ( movement / leg up or down, which ever the case may be ) ;
but would todays Contrarian Investor in this instantaneous Technological Data Age have done the opposite to : averaging Market ( Profits ) Up NEVER averaging Market ( Losses ) Down ; whenever " Short Selling " was available to ?
as early 20 th C " Operator " / Trader Jesse Livermore said : " profits take care of themselves but losses never do " ; DAILY ( instead of multi - Month ) Investors risk becoming Speculators, as it is impossible for 1 man ( as a " Lone Hand " ) operating 24/7 ;

 

*  invest in Sectors you KNOW best ( what you enjoy doing ; perhaps a Career Occupation or Hobby, SPECIALTY ) ;
THEN in what you feel most COMFORTABLE with ;

 

*  do your OWN Homework Research ( do not rely on " Tips " ) / intensive study from Macro ( & Overseas ) to Micro ( & Local ), the :

 

1. Long - Term Macro Economic Fundamentals & variables,

 

2. Trends - following the Majors : " Trade the Trend " ; Turning Points ( & perhaps Reversals due also to Government Policy Decisions as mentioned above ) for put & call Options, as " Insurance " for any existing Physical Script exposure, unfavourable or favourable, from time to time ;
as much or more so, than :
the up or down Legs / Directions [ buy long &/or sell short ] )

 

3. Short - Term Market observations including Volumes ( previously [ mechanical ] Ticker - Tape reading ;
actually was 1 hour 23 minutes BEHIND on 20 / 10 / 1929 !
& most likely would have caused suspension of Trading, followed by Public CONFUSION, DISARRAY & THEN PANIC ) ;
factors modern day Traders have overcome with instantaneous, electronic / digital data ;
During the previous Bull Market in 1901 the Ticker - Tape was 2 hours behind !

 

observing Short - Term Volumes of Trades in Markets ( X Turnover of Trades = " Market Supply " ) is just as imperative as observing Long - Term Volumes of Money in an Economy ( X Velocity of Money = " Money Supply ", which in turn, dictate the credit conditions in the Markets ) ;
the distinction being that the former Volume & all of its variables are the realm of Domestic Economies & individuals collectively on a Short - Tem basis ;
in contrast, the latter Volume & all of its variables are the realm of Governments & it's Agencies on a Long - Term basis ;

 

learning " the Nature of the Beast " akin to :
quick - moving Consumerism ( Private Debt including the advent of Credit Cards in the 1970s ) e.g. Household basic " necessaries of Life " : food, clothing, shelter, & Health, Education
&/or
slower - moving Business Manufactures e.g. motor vehicle " Durable goods "
Vs
slow - moving Capitalism ( Public Debt ) e.g Public Works Infrastructure " Capital goods " ;

 

the current " Sub - Prime ( Mortgage ) Meltdown " ( Maladjusted Auto Industries Neighbourhoods / Families / [ ex ] Workers since the 1960s Japanese " Miracle " ), the Capital of which is essentially Trading Surpluses of Oil Exporting Nations & some Emerging Countries, REINVESTED back into USA
= recycled PETRO Dollars ( USD $s ; even since the 1 st Oil Shocks of the 1970s & its subsequent Wages Shocks of the 1980s ) ;
&
the subsequent Government " Bailouts " including the Architecture / Structure reinforcement of the USA unique " Stand Alone " Banking System as mentioned at the beginning of this Essay ( & quite rightly so ! ),

 

are akin to a series of Gigantic DEBT SWAPS :
*  FROM Household PRIVATE Debt since the advent of Credit Cards in the 1970s onwards in POTENT COMBINATION with Microsoft DeskTop PCs ( even in the Homes, from which the 1 st Labour Change below, began ) & the instantaneous Internet since the 1980s ; similar to the CLUSTERING of other innovations / inventions & new discoveries like the Gold Rushes of the 19th C ;
*  BACK to Government PUBLIC Debt which had always existed prior to the above Developments,
& after which the Financial Markets were transformed in such a Revolutionary manner that this new, until recently, set of Economic Phenomena should be called the 2 nd INDUSTRIAL REVOLUTION, the 1 st being WW1 & Henry Ford's Model T ;
( as opposed to the 1 st Industrial EVOLUTION : Labour Change ; mid 18th C - mid 19th C Women organisation in the Spinning Mill etc. Factories of UK, & out of their traditional Cottage - Industry Homes for the 1 st time in recorded History, along with Child Labour in the Mines & as Mariners, " Chimney Sweeps " etc. )       

 

4. Sectors, & consequently " Asset Allocation " / Diversification ; " don't put all of your eggs in 1 basket " selection should be  fundamentally objective NOT emotionally subjective, should be based on ALL of 1., 2. & 3. above ;

 

&

 

5. THEN fundamentals of individual Stocks or Commodities ( &/or local Exchanges thereof ) last ( but not on a Daily trading basis, as one would risk deteriorating from multi - Month Investor to Speculator ) ;

 

 

are there Parallels between the Financial Crashes of 1907 / 1929 & 1987 / 2009 ?

 

DEFINITELY NOT !
as illustrated in the Technical factors above,

 

except for the 1, always omnipresent, enduring, underlining Human factor including COLLECTIVE PERCEPTIONS / PUBLIC CONFIDENCE ; Human Nature / Psychology including tolerances, which have been with us since the " Dawn of Man ", always dictating to Human Behaviour consciously as well as sub - consciously, including :
GREED far in excess of HOPE ( Optimism by degrees ), allowing oneself to be Hunter Predator
Vs
FEAR far in excess of Anxiety ( Pessimism by degrees ), allowing oneself to be Prey Gatherer,

 

both of which could be ruled by individual or public INSECURITY & SURVIVAL INSTINCT, in response to, or reaction from, particular Government conditions at any point in time, throughout History ;

 

( Human Nature governing Human Behaviour is exceedingly complex even before getting down to the DNA Micro level !
similar to biological memory micro - chips ;
Economic & Market Events & Shocks motivate Social Actions summed up in 1 word primeval SURVIVAL as in Group Hunting, which drives Social Mood / Herdings ( including the " Mums & Dads " ), which in turn drive Social Behaviours ( the very NATURE of Human Instincts determine Human Behaviour responses or reactions ) ;
 
thus ALL, hopefully orderly, or disorderly Market BEHAVIOUR, especially in specific Commodities & Precious Metals, & more so than broad Finance & Commerce, as illustrated by  www.elliottwave.com  is also exceedingly complex ;

 

given that Markets are a Financial Translation of the MASS accumulative ( & opposite ) effects of both sides to decision – making of many, seemingly, unrelated [ if not also unconnected ] INDIVIDUALS ).

 

tracing the breadth ( amplitude ) & depth in MAGNITUDES ( & time lags ) of Market PSYCHOLOGY associated with either severe reactions or mild responses AFTER, hopefully orderly, or disorderly Economic or Market Events during any Stages or Phase of an Economic Cycle can also be illustrated by EWI Elliott Wave Theory [ International ]  www.elliottwave.com  in HISTORICAL Charts & Graphs, & can also be interpreted as a form of Household & Business AFFORDABILITY INDEX ;

 

 

Understandably, the psychological theory of optimism or pessimism of influential businessmen affecting a business trend upward or downward, is 1 st of several External Factors of Business Cycles. EWI emphasises the Market Traders & " Herd " accumulative affect as consumers generally.  " investors' collective emotions " or " manic-depressive investor sentiment always rules over fundamentals ".

 

"The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. " 

 

 

Many thanks & sincere regards, Jeff M.  Weeks CPA, SA Fin (since 1972)

CPA Accountant, SA Fin Researcher Analyst
Donations welcome for ongoing e-information research analyses, daily
Mobile & SMS 7 days : ~ + 61 4 2888 2844 &/or Phone / Fax : 8 8651 2711
Primary e - Mail contacts@travellersoz.com.au   www.travellersoz.com
Home / EX Backpackers Travellers Hostel, 86-90 Railway Terrace,
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Copyright  c  2007 - 2008  Jeff M.  Weeks  / Cowandilla Nominees Pty. Ltd.  A.B.N. 64 008 081 838

 

 

 

          
           
          
    
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       Home  > Education  > Special Reports  > On Jesse Livermore And His Legacy  
            On Jesse Livermore And His Legacy
            I am choosing to write a short biography of Jesse Livermore and his trading philosophies.  Livermore was a great trader and speculator - always willing to learn, study and open to new ideas.  He was also an eccentric man, unparalleled in his dedication to always gaining an advantage over all other traders and investors.  So why Livermore?  Is it because of the glamour of discussing such a man?  No.  Why not Gann?  Or Buffet?  Was there some type of "secret recipe" for his successes in both the stock and the commodities market?

 

            Definitely not.  I am choosing to discuss Livermore because I believe that the legacy left by Livermore is a very important and instructive legacy for the novice, the amateur, and even the professional trader.  His teachings all throughout his books and biographies were all about basic trading philosophies such as trend-following, buying and holding in a bull market, industry analyses, following the leaders, identifying pivot points, and of course, risk management.  All this did not come easily.  It took Livermore literally years to nearly perfect his system and methods, and it requires intensive studying and effort in order to execute and to stay disciplined.  This is what Livermore has emphasized all throughout his writings - that the stock market is not for the lazy nor the uninitiated.  If one really wants to succeed in making money in the stock market over the long haul, then one will need to put in the necessary time and effort - not only in the studying of the stock market, but in the studying of one's own psychology and tolerances as well.

 

            A more subtle but if not more important question for professional traders to ask is: If Livermore was so great, why did he ultimately lose his fortune again during the Great Depression and why was he not able to make a "comeback" again?  This and the fact that Livermore had periodically suffered from depression throughout his life finally led to his suicide in 1940.  What went wrong?  Traders would often cite his lack of risk management, but I think it goes deeper than that.  Perhaps he was getting older and lost his drive, but I believe there is a more important underlying theme and lesson to all this.  I will discuss this in later paragraphs.

 

            Early on, Jesse Livermore learned that in order to succeed in life, one needs to put in a great deal of time and effort to an endeavor that one enjoys doing.  Of course, it didn't hurt that Livermore also had a great genius with crunching numbers and a great discipline for keeping records.  It also didn't hurt in that Livermore was always willing to learn and was always receptive to new ideas.  As a young lad, he chose the stock and commodities market as a way to keep score and to make his fortune, and this is what he did until the day that he died.

 

            Livermore was a self-made man.  He ran away from home at the age of only 14 and subsequently went to work as a quotation boy in Boston.  He quickly learned the art of "reading the tape" and from here, he proceeded to trade in the bucket shops - and was so successful that he was practically banned from trading in all the major bucket shops in Boston.  From the bucket shops, he relocated to New York and started trading on the Big Board in the office of E. F. Hutton.  This was in the year 1897.  By that time, Livermore had already gained a reputation as the "Boy Plunger" in all the bucket shops in Boston.  He was only 20 years old.

 

            Trading "legitimately" on the NYSE taught Jesse Livermore his first major lesson in how to consistently make money in the stock market.  How?  Within six months of opening his account in a legitimate brokerage firm, he had lost all his money - all $2,500 of it - approximately the equivalent of $60,000 in today's dollars.  The average person will most probably swear off stock market speculation forever if he was to lose his entire fortune in the endeavor, but not so for Livermore.  Of course, he was depressed.  Any emotional being would be depressed on losing his entire fortune.  But this unfortunate development only motivated Livermore to study his mistakes more carefully.  He was able to beat the game in the bucket shops, so why not on the Big Board?

 

            There are many lessons to be learned here.  Let's start with the first lesson.  Please note that I am not going to list them in any particular order.  Each trader/speculator has to deal with their own trading flaws - some lessons may be more applicable than others to one trader but the same lessons may not apply to another type of trader - especially so if he has conquered them.

            Lesson One: Livermore had no prior trading experience except for his trading experience in the bucket shops.  His first mistake was his belief that he could directly apply his prior system of trading to trading in actual stocks on the New York Stock Exchange as well.

            What were the differences?  Why couldn't he directly apply his system of trading in the bucket shops to trading on the NYSE as well?  Livermore studied the differences intently - major money and his future career were at stake here.  He learned several things about the art of speculation.  Among them were:

              1.. The greatest amount of money is made following the major trends - not in the day-to-day fluctuations of a stock or in a particular commodity.  This fact was later compounded by his experience during the 1901 bull market.  He had always been able to call significant bottoms in the stock market and had always be able to initiate long positions at the most opportune time.  And yet, he would always sell his long positions after only making 10% or 20% hoping he will be able to get back in at lower prices.  This usually does not happen.  He eventually learned that in order to make money in the stock market, one will need to adopt a buy and hold strategy in a bull market and only sell when the bull market is on its last legs.

              2.. Livermore had a significant execution disadvantage by taking his actual business to the NYSE.  Not only does he have go pay a high commission (compared to virtually none in the bucket shops although he got a severe handicap when he did trade there), there was also a significant delay between the time he places his order to when the order was actually executed.  This disadvantage is severely magnified when one traded as often as Livermore did in his early days as a trader on the NYSE.  Livermore was handed down the ultimate lesson in the art of execution during the final day of the Northern Pacific Corner on May 9, 1901.  Livermore had anticipated a huge downside move in the morning and a subsequent one-day upside reversal.  He was right, of course, but he ultimately lost his entire stake of $50,000 that day.  Because of the huge volume during that day, the tape was nearly two hours behind; his brokers (who were very able) did place an order to short U.S. Steel and Santa Fe in the morning, but those orders did not get executed until two hours later.  By then, both Steel and Santa Fe had already fallen by over two dozen points.  When Livermore ultimately covered, he did so at levels that were two dozen points higher.  This one-day plunder cost him his entire stake which it took him a long time to build up.

              3.. While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy.  His first successful "raid" on the stock market based on his sound, fundamental studies occurred during the Panic of 1907.  As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong - despite the hopes of the public as evident in the still-rising stock market.  Sooner or later, Livermore concluded, there will be a huge break of epic proportions.  Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric.  J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market.
            There are many lessons to be learned here by professional and amateur investors alike.  While I have always maintained that the majority of traders and investors in the stock market usually under-perform the stock market, it is doubly true that virtually all traders who focus on the short-term eventually lose their capital.  The successful daytraders are a rare breed - and the successful ones can only expect to obtain a return of 10% to 12% a year, at best.  The amateur trader who expects a first-year 100% return by daytrading stocks just does not have a chance.

            A more subtle lesson to be learned is the idea of evolution - evolving one's style to not only fit one's personality, but evolve to the point so that it will fit the market's personality as well.  What made Livermore so successful during the first thirty years of the 20th century was this: Not only was he multi-talented in the traditional sense (his skills in analyzing long-term trends and fundamentals were as good as his skills in tape-reading and in daytrading), he was also multi-talented in the sense that he was able to evolve with the market very successfully.  He had always been flexible in either trading the long side or short side - and he was also able to sit out in a market that was devoid of activity as well.

            Lesson Two: Do not depend your analysis solely on "insider information."  Livermore learned this lesson the hard way - twice in all.  The first lesson was moderately costly; the second lesson was to cost him his entire fortune:

              1.. Livermore had always been skeptical about the dependability on "insider information."  After all, why would top management tell outsiders that he was selling shares in his own company because he thinks business will be bad going forward (these were the days before insider-trading was made illegal)?  Telling outsiders would only add more selling pressure to the stock, and vice-versa.  The legendary trader, Bernard Baruch, had always maintained that insider information was useless, and that a person was doing him a favor if he would keep the insider information to himself and not reveal it to him.  Livermore got his first real lesson sometime after he closed out his profitable short position in Union Pacific right before the 1906 San Francisco Earthquake.  After three days of tape-watching, he concluded that the shares of Union Pacific were being accumulated.  He started to accumulate shares in Union Pacific as well - only to be stopped by Ed Hutton, the great New York financier and owner of the E.F. Hutton brokerage house, and a personal friend.  Hutton told Livermore that he had inside information and that the insiders have set up a pool and were dumping shares to him at a furious rate.  Sooner or later, Union Pacific is going to tank.  Despite his own beliefs and the reinforcements of all those beliefs from years of tape-watching, Livermore liquidated his 5,000 shares of Union Pacific at $162 - making only $10,000 in the process.  The next day, the company announced a 10% dividend and the shares shot up by an additional ten points.  The opportunity cost?  $50,000 in additional profits which would be equivalent to over one million dollars today.  Livermore did not get upset or emotional, but after this incident, he swore that he will never listen to insider information again and that he will only trust his tape-watching skills and instincts from now on.

              2.. The second lesson that was handed down to Livermore did not strictly involve insider information, although it was pretty darn close to it.  It also taught Livermore a little about himself - his gullibility and his

            Henry K. To, CFA
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