Every one who has ever bought a company share or a mutual fund must have heard of Warren Buffett – one of the wealthiest men on earth and a firm proponent of long-term value investing principles. His holding company, Berkshire Hathaway, has made immense amounts of money for its shareholders and owns stocks is some of the largest and most well-known companies. His annual letters to shareholders – liberally sprinkled with worldly wisdom - are avidly read by investors and fund managers all over the world.
But who is Jesse Livermore, and why should he be compared with Warren Buffett? Those who have already read ‘Reminiscences of a Stock Operator’ by Edwin Lefevre may skip to the last paragraph. For the less informed, here is Jesse Livermore’s fascinating story:
A farmer’s son, Jesse left home in 1891 and joined a brokerage firm in Boston, USA posting stock quotes. He was 14 years old. He started placing small wagers in a ‘bucket shop’ – a gambling establishment that accepted bets on stocks and commodities without actual physical delivery. Sort of like our earlier ‘badla’ and current F&O trading. In a year, he had made $1000 (equivalent to about $25000 in today’s money).
He continued betting for a few more years till he got banned from the ‘bucket shops’ for making too much money. He left for New York and started proper trading in the stock market. In 1901, within a year of his first of three marriages, he went broke. His wife refused to lend him her jewellery to start afresh and their marriage fell apart.
In the crash of 1907, Jesse observed a liquidity crunch and heavily shorted the market. He ended up with a profit of $3 Million – a huge amount in those days – and promptly blew most of it away on a bad cotton trade. He had developed certain trading rules for himself, but forgot them in his panic. He listened to other people’s advice and kept adding to his already losing position. By 1912, he had debt of $1 Million. During and after World War I, he not only made good all his losses but had multiple homes and cars in different parts of the world. At age 41, he married an 18 year old dancing girl.
Then came the crash of 1929. Liquidity conditions were similar to that of 1907, and Jesse shorted stocks as if there was no tomorrow. Almost every one lost money in the great crash. Livermore ended up with a whopping $100 Million profit. In 1933, he married for the third time. It was his wife’s 5th marriage. All her previous husbands had committed suicide.
By 1934, Jesse Livermore went bankrupt again. No one knows how he managed to lose such a large sum of money. In 1940, he shot himself. A suicide note for his wife stated that he was a failure and this was the only way out.
Those of you who do not like the boring, long-term buy-and-hold investing style of Buffett and prefer the excitement and adrenaline rush of short-term trading, here is a famous quote from Jesse Livermore: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”