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February 1, 2002

Jesse Livermore

By Gregory Bresiger

Also in this article

World's Greatest Stock Trader

by Richard Smitten

(John Wiley & Sons, New York, 2001, 319 pages) $19.95

reviewed by Gregory Bresiger

Benjamin Disraeli is once reputed to have recommended biography above all other kinds of reading. He said that it is, "life without theory." The 19th century British statesmen would have likely enjoyed this effort. By exploring one man's controversial life - a life that has lessons in both its massive victories and defeats - I believe one can learn about markets, trading and, most of all, how success can breed hubris and failure sometimes generates eventual success.

This is a superb biography of a fascinating trader. It is well worth every trader's time. Livermore is a rags to riches story of a bright young man who grows up in New England. He is a young man who is fascinated by numbers and does well in school. However, his father removes him from school and insists that the young teenager will have a life as a farmer.

Livermore rebels. Even at an early age he leaves home. He obtains a job as a chalkboard boy at PaineWebber in the 1890s. Livermore is fascinated. Soon he is making trades for himself. Soon afterwards, he starts out with a small stake and begins to make his living by beating bucket shops in New England.

That is until he becomes the market equivalent of a card reader, the man who, once identified, is always shown the door in a casino because of his consistent ability to beat the house and because of the danger of his bankrupting the business. Livermore is soon shown the door at every bucket shop in New England.

Later on he earns a scurrilous reputation with bucket shops in New York and New Jersey. By his early 20s, Livermore is making a reputation as someone who is too good - too good because he sometimes beats himself. He often disguises himself so he can place orders. He becomes known as the boy plunger. He rubs elbows with associates of J.P. Morgan who ask him to stop short selling, which supposedly helps stop the panic of 1907. E.F. Hutton offers to stake him whenever he must start over again.

What makes Livermore great? (But certainly not the greatest.' The title of the book is an example of hyperbole that publishers use to induce people to buy.) Livermore used a trading system that worked up until about the last seven or eight years of his life, when regulation took away many of his trading advantages.

But some of his principles are still worth examining. He had three rules: "First, decide on the overall direction of the market. Determine the line of least resistance. Be sure of the basic trend. Second, develop a buying strategy. Probe the market. Test it by trading small positions first. Do not go in and bet your whole stash on impulse. Third, be patient and wait for all the facts. Wait for a move to play out. It is the big moves that make the big money." (pages 66-67).

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