Faith in the System

If you think that all investors were met with financial ruin in the Great Crash of ’29, think again. Irwin Greenstein tells the story of a man who developed a financial strategy that was so airtight; he escaped the crash without even a bruise.

Born and raised on a New England dirt farm, this young man went on to become the greatest stock trader ever – and one of the most despised men of his time.

He lived through two of America’s most horrible stock crashes – making millions in a single day, as others jumped from windows to escape financial ruin. At times, he controlled the entire American economy from his posh New York office. He was blamed for the great crash of 1929. He survived death threats and kidnapping plots – on several occasions.

His name was Jesse Livermore. And in 1940, he killed himself with a .32 caliber pistol in a New York City hotel.

Jesse Livermore: A Knack for Numbers

In 1891, at the age of 14, Livermore arrived in Boston on the back of a horse-drawn wagon. He had nothing to his name except a five-dollar bill that his mother had slipped him – against the will of his father, who argued that the boy should stay put and work the plow.

But his father never understood his son’s knack for numbers … a God-given gift that would be the source of his fortune. As luck would have it, the wagon stopped in front of the Paine Webber office. Livermore marched in and asked for a job. It just so happened that one of the chalkboard boys (who posted the results of the ticker on giant blackboards) didn’t show up for work that day. Livermore got a job immediately.

Suddenly immersed in the wild action of trading stocks, Livermore gradually began to realize that the market had a life of its own. And he was bent on trying to figure it out.

Night after night, after a grueling day at work, he went back to his dingy boarding-house room. He would furiously enter notes and trends in a diary…trying to decipher the market’s patterns. During those lonely years, two realizations formed his entire trading philosophy … and would make him one of world’s richest men.

The first realization was that he had to become a student of the market. He had to commit himself to an ongoing education … not only of the market dynamics, but also of the personality flaws that caused people to make fatal trading errors. The other realization was that he needed a system – a set of self-imposed rules that would govern his life as a trader.

His belief in a system arose from his detailed observations that the stock market had an inherent logic … and that it was only through logic that a trader could beat it – and make a real killing.

Jesse Livermore: Testing Theories

Two years into his self-education, Livermore felt confident enough to test his trading theories. The problem was he didn’t have a stake – a wad of cash that he could use to start trading. Like other poor men at the time who sought their riches in the stock market, Livermore headed straight for the notorious bucket shops of Boston.

Operated by gangsters, bucket shops attracted stock gamblers like moths to a flame. That was because guys who were broke and desperate could open accounts and trade for a slim margin – usually ten cents on the dollar. So with fifty cents you could invest five dollars. And if you lost, the bucket shop kept the proceeds. With house odds of 95-to-1, most men met financial ruin. Except for Livermore.

Armed with his system, Livermore knew he could beat the house. And that’s exactly what he did. Time after time, Livermore bet on stocks and won. In fact he won so often he was banned by the bucket shops in Boston. Shut out, he decided to put his skills to the ultimate test. He went to Wall Street.

In New York, he quickly made a fortune…but lost it when he strayed from his system. He was forced to return to the buck shops to rebuild his stake. Since he was banned in Boston, he went to St. Louis and then New Haven. Finally, he was ready to return to Wall Street to make another killing.

In the summer of 1929, Livermore’s extensive analysis of the market pointed to a disastrous downturn. He just didn’t know exactly when it would happen. He started shorting the market, his positions growing increasingly larger as Wall Street collapsed around him. The results were amazing…

While millions of people waited in soup-kitchen lines, he made a staggering $100 million during the Great Crash of `29.

Jesse Livermore: Downfall

The millions of investors who had lost everything complained about Livermore. People started questioning how he made so much money, while they ended up destitute. Even The New York Times blamed him directly for the tragic crash. Death threats came directly to his phone line – and he took them head on, talking his way out of them.

After his $100 million windfall, Livermore lost his passion for trading – and with it his fortune. No one could understand why – not even himself. It wasn’t until his legacy had been chronicled that experts understood he had been suffering from clinical depression. But at the time there was only way out for him…a .32 caliber slug to the brain.

It was the same, magnificent brain that had developed one of the most successful trading systems ever.

Like most great concepts, Livermore’s incredible system was simplicity itself. It involved market timing (knowing when to get in and out), quickly cutting losses, anticipating trends and optimizing the market’s momentum (up or down).

Livermore was the first trader to actually demonstrate that both a commitment to market understanding, and a bona fide trading system were the keys to making millions in the stock market. And although Livermore is dead, his ideas live on to form the cornerstone of modern stock trading principles.


Irwin Greenstein
for The Daily Reckoning
November 18, 2004

P.S. Like most great concepts, Livermore’s incredible system was simplicity itself. It involved market timing (knowing when to get in and out), quickly cutting losses, anticipating trends and optimizing the market’s momentum (up or down).

As it turns out, the MST Trader System, developed exclusively by leading small-cap stock expert, James Boric, utilize these core-trading criteria. The MST Trader System helps make winning trades consistently and safely – just like Livermore’s system did in the early 1900s. There’s only one catch…

Boric’s system may actually be better!

Last night, we had dinner at Chez Gerrard’s – a nice restaurant, but not a fancy one. The bill, including only a single bottle of wine, was 130 pounds, or about $200. But so delighted was your editor with his companions, he would have gladly paid it twice.

We dined with our daughter Maria and two of her aspiring actress friends – one from Ireland, the other from Australia, both beautiful and charming.

"London is so expensive. I have to be very careful what I spend," said one. "My dad sends me money. We’re Australian. But my dad is an engineer. He invented a communications chip that makes WiFi connections go faster. I don’t understand how it works. But when he invented it, it increased the speed by 46,000 times or something like. So he sold the little company he had to Cisco. We actually went to live in Palo Alto for a while. But he kept his money in Cisco stock. Which means it’s kind of in dollars. The stock went way down. And now the dollar’s going down too…"

The dollar hit a new low yesterday. You would need more than 1.3 of them to buy a single euro. In London, Americans cringe every time a waiter brings the check. A meal that would cost between $20 and $30 in the U.S. easily costs $50 in London…and it’s getting more expensive every day.

Americans don’t typically worry about the dollar. They earn their money in dollars and pay their expenses in the same coin of the same realm. But everyday they grow poorer. Because in the eyes of the rest of the world, they earn less…and what they own is worth less than it was the day before.

But what can you do?

The trick is earning money in euros, pounds or kroner… but spend it in dollars. You could, for example, buy a high yielding British utility paying more than 5% yield. Just don’t come to London to spend your dividends.

Likewise, the best way to protect your capital is to move it out of dollar-based investments. But since all central banks seem to be competing to destroy their own paper currencies – lest they lose the competitive advantage of having low-priced exports…and since U.S. deficits have the curious effect of inciting foreigners to print even more of their own currency…there is no sure way to know which paper will go bad the quickest.

But when the dollar goes down, it must go down against something. Most likely, it goes down against gold, the ultimate anti-paper…nature’s anti-dollar…the real money to which investors tend to turn when the printing presses overheat.

Gold rose to a new high for this cycle yesterday – $445 an ounce.

"I’m betting that there is a correction in gold before it goes much higher," warns colleague Dan Denning. Too many people are long gold and short the dollar."

We hoping he’s right. We’d like another opportunity to buy gold below $400. Six months ago, we thought we’d already seen the last of $400 gold. Maybe now, we really have.

But even better than gold, says our friend, and "Investment biker," Jim Rogers, is commodities. "No country has ever gotten itself into this kind of debt situation has ever in history gotten out without a crisis or a semi-crisis," says Rogers. The crisis is likely to cause investors to lose faith in U.S. stocks, bonds and the dollar. Instead, they will want real assets – such as commodities and gold. Commodities are typically quoted in dollars. As the dollar weakens, commodities go up. But there’s something else pushing up commodity prices. Buy cotton, sugar and coffee, says Rogers, because they are selling at historically low prices, and because demand – particularly from Asia – is growing rapidly. According to Rogers, commodities themselves, the companies that produce them, and the countries that export them will be big winners in the years ahead.

More news, from our friends at The Rude Awakening:


Eric Fry, reporting from bustling Wall Street…

"And as the knee-bone is connected to the thighbone, the bond market is connected to the financial stock sector. If therefore, the bond market is limping, financial stocks could easily stumble. And if the financials stumble, the entire stock market might well break a leg."


Bill Bonner, back in London:

*** Gold comes in from the cold…we just received this note from Dan Denning in London…

"There was a hot IPO on Wall Street today…in the gold sector! The long-awaited gold ETF is finally here. Each share represents 1/10th of an ounce of gold, and punters can trade them just like the stock of a hot new technology company!

"Bugs Beware: It could be a classic contrarian sell signal in the short term…just when the crowd can get in, you see a top."

*** Our old friend Gary North sends this note:

"Says the BSE of India:

The total market cap of the BSE Index as of April 2004 was $226 billion.

Says the NYSE:

The combined market value of eBay Inc., Google Inc., Yahoo Inc., Yahoo Japan Corp. and Inc. was more than 230 billion last week.

I’d rather own India."

*** The Dow rose again yesterday, on news that Kmart and Sears are getting together. Can anything stop the Great American Consuming machine?

Yes, something can. Inflation? Producer prices recently had their biggest increase in 14 years. Yesterday’s CPI announcement had prices up 0.6% in October – a far bigger increase than economists had hoped for.

What else? Falling dollar? Consumer saving? Stock crash?

What will happen, we do not know. But something will happen. What, when, how – The Daily Reckoning is on the story.

*** "Dad…it bothers me the way the other kids in school talk about America. I’m an American, after all. And they say that the country is really going crazy now that Bush has been elected for another term…that we’re going to attack other countries…and that most Americans thought it was okay to shoot those Iraqi prisoners…and that they’re going to arrest doctors who perform abortions and try them for murder. They say that the Christian fundamentalists are acting like Puritans at the Salem Witch trials and things like that. I don’t really keep up with the news. And I don’t like Bush either, but I can’t believe they’re right about America…It’s not true, is it?"

The Daily Reckoning