What were the mistakes of the greatest trader ever?

Everyone always mentions his quotes that are still used to this day by successful traders…over 100 years later.

Or how much money he made.

Or how he started out as a kid, trading stocks in bucket shops, shoulder to shoulder with men.

Or how at one point, he became one of the richest men in the world after correctly predicting and shorting the great stock market crash of 1929.

But not too many talk about the mistakes that he himself had openly described.

I’m talking about Jesse Livermore, whose exploits were made famous by the classic book on trading, Reminiscences of a Stock Operator.

There is much to learn within that book.  Many of his quotes are so well-known they have become a part of the trading culture…quotes like:

  • Remember, don’t fight the tape!
  • Markets are never wrong, opinions often are.
  • Cut your losses quickly, without hesitation.
  • There is only one side of the market and it is not the bull side or the bear side, but the right side.

If one just followed a small handful of his rules…actually traded his quotes, they actually might have a chance at becoming a successful trader.

But there were plenty of mistakes that Jesse Livermore made.  He made and lost many fortunes, several times over.

Much of the time it was because he legitimately made mistakes, mistakes that he then sought to correct so they would not be made again.  Other times, it was because he simply broke his own rules.  He was human, after all!

But I think it is helpful to look at the mistakes that he did make and analyze what he himself thought of them, and add my own spin on them as well.  They are painful, but worth learning from.

So here are a few of them….

Lesson 1 – Getting caught up in an emotional trading frenzy without looking at the big picture

Here, Jesse describes a time where he realized that the stock ticker that he was watching and basing his trading orders from, was delayed.  Even when he realized that a very fast-moving market was faster than the ticker that he was trading off of, he continued to trade.  He traded in a frenzy, in and out and literally boiled the profits that he had worked so hard to build up over many months into nothing.

Here he describes his plan where he wanted to short the market, then get out of his short position after a sharp decline and go long.

There I was on the morning of May ninth with nearly fifty thousand dollars in cash and no stocks.  As I told you, I had been very bearish for some days, and here was my chance at last.  I knew what would happen – an awful break and then some wonderful bargains.  There would be a quick recovery and big profits – for those who had picked up the bargains.

The market had fairly boiled, as I had expected.  The transactions were enormous and the fluctuations unprecedented in extent.  I had put in a lot of selling orders at the market.   The tape was way behind the market and reports were slow in coming in by reason of the awful rush of business.  When I found out that the stocks I had ordered sold when the tape said the price was say, 100 and they got mine off at 80, making a total decline of thirty or forty points from the previous night’s close, it seemed to me that I was putting out shorts at a level that made the stocks I sold the very bargains I had planned to buy.  So I decided instantly to cover my shorts and go long.

The divergence between the printed and actual prices undid me.  I wonder why I didn’t then see both my trouble and the remedy for it.  I did worse than not see it; I kept on trading, in and out, regardless of the execution.

Everything happened as I had foreseen.  I was dead right and – I lost every cent I had!

He realized that the ticker that he had come to trust and trade-off of was delayed, and not ideal to make decisions off of in a rare, fast-moving market…but he did it anyway.  He got caught up in the trading frenzy and vaporized his account he had taken so long to build up.

Have you ever been so caught up in making bad decisions, where you know you are not following your plan…but you go ahead and do it anyway?  I’ve done it.  Afterwards, it’s almost as if you wake up from a bad dream and wonder, “What the heck was I doing?  Why did I do that?”

Lesson 2 – Listening to tips

In this case, Jesse takes a vacation in the summer to Saratoga Springs, NY.  His broker, Harding Brothers, had a branch office there, so he would stop in and watch the market.  The branch manager was someone from the New York office…who knew that Jesse didn’t take tips.

He was watching one stock, Union Pacific:

The price was high, but the stock acted as if it were being accumulated.  I watched it a couple of days without trading in it, and the more I watched it the more convinced I became that it was being bought on balance by somebody who was no piker, somebody who not only had a big bank roll but knew what was what.  Very clever accumulation, I thought.

As soon as I was sure of this I naturally began to buy it, at about 160.  It kept on acting all hunky, and so I kept on buying it, five hundred shares at a clip.   The more I bought the stronger it got, without any spurt, and I was feeling very comfortable.  All of a sudden the manager came to me and said, they’d got a message from New York – they had a direct wire of course – asking if I was in the office, and when they answered yes, another came saying: “Keep him there.  Tell him Mr. Harding wants to speak to him.”

“Why are you buying all that Union Pacific?”

“It’s going up,” I said.

“Going up, hell!  Don’t you know that the insiders are feeding it out to you?  You’re just about the easiest mark up there.  Get out while you’ve still got a chance,” he said.

“The tape says they’re buying it,” I insisted.

I don’t know what happened to me, but I suppose I must have concluded that my tape reading told me the stock was being absorbed simply because very clever manipulation by the insiders made the tape tell a story that wasn’t true.  Possibly I was impressed by the pains Ed Harding took to stop me from making what he was sure would be a colossal mistake on my part.  Whatever it was that made me decide to follow his advice, I cannot tell you; but follow it, I did.

I sold out all my Union Pacific.  So after I got rid of my long stock I sold four thousand shares short.  I put out most if it around 162.  The next day the directors of the Union Pacific Company declared a 10 percent dividend on the stock.  Of course I realized, the moment I heard the news of the declaration of that unprecedented 10 percent dividend, that I got what I deserved for disregarding the voice of experience and listening to the voice of a tipster.

I found out when I got my reports that Ed Harding’s kindly intentioned interference cost me forty thousand dollars.  A low price for a many to pay for not having the courage of his own convictions!  It was a cheap lesson.

Lesson 3 – Being right, but too early

This is an interesting one.  Jesse evaluated the market in 1906 and correctly figured out many reasons for the start of a bear market.  There was the Boer War in South Africa, which mean the U.S. market wouldn’t get help from British investors as they had in the past.  There was the famous earthquake and fire in San Francisco, that was cascading through the economy.  Overall, he saw that there would be a pinch that would be felt, and it was coming soon.

At this point, he thought he had finally found the final key to his long-term trading success, which was to make sure that his trades aligned with the overall direction of the market…buy in a bull market, sell short in a bear market.

In his words:

For years I had been the victim of an unfortunate combination of inexperience, youth and insufficient capital.  But now I felt the elation of a discoverer.  My new attitude toward the game explained my repeated failures to make big money in New York.

So since he rightly believed that there was a bear market coming…

Such being the case there was but one thing to do – sell stocks!  And now when I decided to sell I plunged.  Since we undoubtedly were entering upon a genuine bear market I was sure I should make the biggest killing of my career.

There was one major problem though.  Right after he went in, shorting the market with all of his account, the market sold off and he had a paper profit.  Then it vanished as stocks came back and his paper losses grew.  He couldn’t take it any more and covered, suffering huge losses.

So he waited for another point to sell short and did…at this point with a massively reduced account size.  Sure enough, there was another rally and he had to cover.  More losses.  Finally:

There I was – right and busted!  I tell you it was remarkable.  What happened was this: I looked ahead and saw a big pile of dollars.  I had a brand-new shovel in my hand.  There was not another soul in sight, so I had no competition in the gold-shoveling.  I naturally started toward it on the run.  Before I could reach the dollar-pile my wind went back on me and I fell to the ground.  The pile of dollars was still there, but I had lost the shovel, and the wagon was gone.  So much for sprinting too soon!

I saw, and knew what I saw.  Thinking about the reward for my excellent sight kept me from considering the distance to the dollar-heap.  I should have walked and not sprinted.That is what happened.

I had made a mistake.  But where?  I was bearish in a bear market.  That was wise.  I had sold stocks short.  That was proper.  I had sold them too soon.  That was costly.  I was in such a hurry to try the new key that i did not notice that there was another lock on the door – a time lock!

So here he realized that it would have been better to scale into a trade.  If you are going to go big, make sure the trade is going in the right direction before adding to it.  This has actually been one of my biggest areas that I’ve had to work on.  In my fear of missing out on what looks to be an amazing trade, I jump in too big and too early!

Lesson 4 – Don’t blindly follow an Expert or “Guru”

This is a painful lesson, where in his words, he “lost nine-tenths” of his fortune because he was influenced into a huge position by the persuasive personality of Percy Thomas, known then as the “Cotton King”.  Percy had gone bankrupt trying to corner the cotton market.  Though he was bankrupt, he had tremendous knowledge of the fundamentals of the cotton market.

Percy sought out Jesse to partner together to again try to corner the cotton market.  At the time, Jesse thought cotton was going down and had been shorting.

This guy was apparently a charming personality, fun to be around and had tons of knowledge about the cotton market, which Jesse admired.  Initially Jesse rebuffed his appeals to partner together.  Percy was trying to convince him that cotton was going up and that he shouldn’t be shorting the market.

I was not bullish on cotton, but he was.  I could not see the bull side at all, but he did.  He brought up so many facts and figures that I ought to have been overwhelmed, but I wasn’t.  I couldn’t disprove them because I could not deny their authenticity, but they did not shake my belief in what I read for myself.  But he kept at it until I no longer felt sure of my own information as gathered from the trade papers and the dailies.  That meant I couldn’t see the market with my own eyes.  A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.

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.  I started to buy cotton and in a jiffy I had my usual line, about sixty thousand bales.  The market was not going my way.

Pretty bad, huh?  Not only did he get convinced out of his previous short position, but he went long in the opposite direction because his judgement was clouded.  He was following an expert, a guru, which made him feel like he could not trust his own judgement.  Jesse had always traded off of his own analysis, ignoring tips and certainly never followed “experts” such as Percy.

But here he was in an uncomfortable position, blindly following someone else’s trade advice.

But it got worse, because he then continued to buy more and more cotton.  He then violated yet another of his rules by continuing to average down on his long position, even selling his profitable position in wheat!  He always cut his losses short and let his profitable trades ride.

I did precisely the wrong thing.  The cotton showed me a loss and I kept it.  The wheat showed me a profit and I sold out.  It was an utterly foolish play, but all I can say in extenuation is that it wasn’t really my deal, but Thomas’.  Of all speculative blunders there are few greater than trying to average a losing game.

And so I sold my wheat, deliberately cut short my profit in it.  After I got out of it the price went up twenty cents a a bushel without stopping.  If I had kept it I might have taken a profit of about eight million dollars.  And having decided to keep on with the losing proposition I bought more cotton!

In the end, he was pretty much cleaned out, losing most of his significant fortune because he had blindly followed an “expert”.

I was not completely cleaned out, but I had left fewer hundreds of thousands than I had millions before i met my brilliant friend Percy Thomas.  Percy Thomas went out of my life.

Really, we have 2 lessons here…don’t follow a guru and don’t continue to average down.  Cut your losses short and let your profits run!

Lesson 5 – Trying to force the market to pay you

Have you ever started to trade with a specific goal in mind?…maybe you say to yourself, “I am going to try to extract at least $400 a day with my trading”, or “I really want to get a new car, let me make some trades to pay for it”

Well, right after Livermore was almost cleaned out by blindly following Percy, he then felt the need to force the market to pay him $200,000 in cash.

I ran up first against illness and then against the urgent need for two hundred thousand dollars in cash.  A few months before that sum would have been nothing at all; but now it meant almost the entire remnant of my fleet-winged fortune.  I had to supply the money and the question was: Where could I get it?

There was only one alternative that I could see, and that was to take it out of the stock market!  You will agree with me that the hope of making the stock market pay your bill is one of the most prolific sources of loss in Wall Street.

It is certainly no way to trade.  Well, that crowning folly of my career as a stock operator was the last straw.  It beat me.  I lost what little my cotton deal had left me.  I persisted in thinking that the stock market must perforce make money for me in the end.  But the only end in sight was the end of my resources.

He goes on to explain why it is so destructive to try to get the stock market to pay for the pressing needs that you have in life:

What does a man do when he sets out to make the stock market pay for a sudden need?  Why, he merely hopes.  He gambles.  He therefore runs much greater risks than he would if he were speculating intelligently in accordance with opinions or beliefs logically arrived at after a dispassionate study of the underlying conditions.  He cannot afford to wait.  The market must be nice to him at once if at all.

Lesson 6: Not following your own trading rules

In all of the prior examples above, Livermore’s losses were a result of not following his own rules!  He violated them in all of these examples:

  • Don’t take tips – He did at Saratoga
  • Don’t follow gurus & don’t average down – He blindly followed Percy the Cotton King & continued to average down.
  • Don’t trade with emotion – He did on the May 9th example
  • Trade in the direction of the trend – He tried to short the market way too early in 1906
  • Don’t try to force the market – He lost the rest of his fortune trying to come up with $200,000

All of these examples are from the Reminiscences book.  It ends with Jesse in 1923.  Jesse ended up making his fortune back before the great stock market crash of October 1929.  Then the crash hit.

He became one of the richest men in the world!  He had lined up a substantial short position, right at the very peak of the bull market.

What happened after that?

Well, in 1934…he was completely broke.  Again.

Nobody knows exactly what happened, but we can be sure of one thing…

He didn’t end up following his trading rules.

After all, he’s human. Just like you and me.

Following your own trading rules can be so difficult, because what makes a great trader, generally doesn’t make a good, nice human.  Discomfort and profit stand side by side.  It feels uncomfortable following the rules that lead to trading success.

We have to try though.

Let me know if you have made mistakes like these, and hopefully…what you learned from them!  🙂

– Glenn

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  • Hi Goblin,

    Haven’t looked at stock market for months? Do you have any stocks in your watchlist?
    I do see the market right now is quite bullish.



  • Hey there! This is my 1st comment here so I just wanted to give a quick shout out and say I really enjoy reading through your blog posts. Can you recommend any other blogs/websites/forums that go over the same topics? Thank you so much!


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