Up to this day, I have been noticing that majority of investors are clueless as to what exactly they want to achieve or accomplish.
They are inspired and guided only by the beautiful—but very dangerous—thought that one can possibly “become a large winner” and have financial freedom. Having been in their place before, I know they have no idea exactly just how.
Even among those who know how to use technical or fundamental analysis, or those who are supposedly adept in the method of “forecasting market trends and timing or measuring a stock’s intrinsic value,” there are still those without any particular goal except make a killing and become rich.
Livermore
This is exactly what happened to one of the investing greats in Wall Street during the early part of the 20th century: Jesse Livermore.
Livermore started his career in the stock market as a 14-year-old board boy, posting stock quotes for the Paine Webber brokerage firm in Boston. He began to trade for himself by the age of 15. He reportedly became a “big winner” right away.
Over the years, he “perfected his tape-reading into a science,” such that he developed the uncanny “ability to detect certain patterns in the behavior of stock prices before they embark on an advance or decline.” With such a skill, he turned into a contrarian and become famous for his short-selling sorties (selling a stock that is not owned by the seller).
He started to hit big in 1906 when Wall Street was on the uptrend and “everyone was buying, except Jesse.” No one knew—even him, maybe—that a catastrophe was about to happen. And it happened: The big earthquake and great fire in San Francisco, followed by the general market crash.
Livermore gained and lost in his trading forays.
He was reportedly worth $3 million after the 1907 crash, and became $100 million-rich after the 1929 crash. Adjusted to inflation, his $100 million earnings then is estimated to be about $1.39 billion today.
Livermore’s successes were not just about hunches and skills to read price patterns and trends, but some trading philosophy he developed while winning or losing.
Among the major principles that he formulated included the following: “Money is not made in day trading on price fluctuations; focus on the market as a whole, rather than on individual stocks, for you will have greater success from determining the direction of the overall market than attempting to pick the direction of an individual stock without concern for the market direction; adopt a buy-and-hold strategy in a bull market and sell when it loses momentum; study the fundamentals of a company, the market and the economy because this will separate successful investors from unsuccessful investors by the level of effort they put into investing; investors who focus on the short term eventually lose their capital; and ignore insider information, make your own independent analysis using multiple sources; and embrace change by adapting investing strategies to evolving market conditions.”
Livermore would later declare bankruptcy in 1934, with the Chicago Board Trade automatically suspending him as member. It was never disclosed how Livermore lost his great fortune.
In November 1940, he died after he shot himself at the Sherry Netherland Hotel in Manhattan at the age of 63.
At the time of his death, Livermore’s estate was estimated at over $5 million.
Bottom line spin
Livermore admitted he did not follow his own rules strictly, attributing his losses and failures to this.
But what proved fatal, I believe, was that he did not have an investing goal. Coming from a poor family before hitting the big time, he did not have a clear idea of financial freedom.
He was, like most of us up to now, seized by the ambiguous notion that to have financial freedom, one has to get rich by hitting it big in an instant.
This beautiful thought is, at best, uplifting but is a fruitless consuming fantasy in attaining financial freedom. This is because financial freedom is a standard of living that you want your life to revolve around. This is also the reason why personal finance advisors would rather call it financial independence.
Livermore had none of it. He would not have ended tragically, had he known this Roman proverb: “The crowd, the world, and sometimes even the grave, step aside for the man who knows where he’s going, but pushes the aimless drifter aside.”