The Boy Plunger

In an insightful book, “100 Minds that made the market”, the author, Ken Fisher, writes on Jesse Livermore.

Jesse L. Livermore

“Jesse Livermore was right when he said, “Speculation is not an easy business. It is not a game for the stupid, the mentally lazy, the man of inferior emotional balance.” He played anyway-and thrived, sometimes. But the ex- citable “J.L.,” one of Wall Street’s greatest speculators, spent his ﬂamboyant life on an emotional roller coaster, coasting between fame and ruin.

Far from stupid and nowhere near lazy, the blue-eyed “Boy Plunger” stayed true to his trade, marrying three times while keeping an endless supply of mistresses, drinking like a ﬁsh and yachting aboard his 202-foot Anita. “The more I made, the more I spent,” he whined. “I don’t want to die disgustingly rich!” A society page’s dream, he reportedly courted Diamond Jim Brady’s lover, Lillian Russell, and temporarily won her favor. But like everything else, he could win, but he couldn’t keep.

His career was boom or bust. He made himself a millionaire four diﬀerent times following bankruptcies,

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recouping his fortunes as spectacularly as he lost them. Despite incredible resiliency, < ?xml:namespace preﬁx = st1 ns = "urn:schemas-microsoft-com:oﬃce:smarttags" />Livermore‘s comeback ability-and his fortune- dwindled during the 1930s when new government regulations outlawed many of his tactics. The dapper dresser, in turn, marked the end of an era by blowing his brains out in 1940. Like the man said, speculation is not an easy business.

Making his name in the anything-goes, pre-SEC market, Livermore concealed positions, cornered stocks, bought heavily on margin, planted phony publicity and gathered inside information to make his killings. Operating on the sly and on his own (taking on pools and partners only when broke), he worked from a secret Manhattan penthouse staﬀed with statisticians. He swung with the market, foreseeing popular trends and avoiding them. He didn’t really care which way the market moved, just as long as it moved and he could make a buck! In the 1929 Crash, for example, he started bullish, then switched sides, only to gain millions on the short side-and lose about as much in his long positions!

Livermore mastered market price fluctuations. Reading the ticker with uncanny accuracy, he first started trading in Boston bucket shops, which were considered an outrageous gamble to most. Bucket shops provided a chance to bet on the market without actually buying stocks. Like investors at a broker’s office, “bucket shop investors” bet on which way a stock would move, paying commissions and a small margin, but, unlike a broker’s office, actual orders to buy were discarded. As a general rule, and the one that kept the bucket shops in existence, people can’t predict stock prices based on prior stock action, so trying to read the tape and bet on it is a game that, Las Vegas-like, pours money into the house and out of the customers’ pockets. But Livermore was the exception that proves the rule-the very rare bird who could read the tape and tell where a stock was going.

Bucket shops were not particularly respectable, but for Livermore they were profitable. By 15, he won $1,000 speculating during lunch breaks of his first and only job as board boy for Paine-Webber! Then, encouraged by his first speculative venture “plunging” $10 in a railroad and winning $3 when he sold out-Livermore quit his job to buck bucket shops full time. In no time, he was beating every shop he entered, reaping profits and an unmerciful reputation!

Such success at bucket shops was unheard of, and, as a result, he received the highest degree of ﬂattery- banishment from trading, not from one or two of them, but from all of them! Not willing to give up his meal ticket, Livermore resorted to aliases and disguises to continue speculating. The aliases worked at ﬁrst, but the

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disguises became necessary when he developed the label of “the boy plunger!”

When it became hard to ﬁnd a bucket shop in the Northeast where his reputation hadn’t preceded him, he hopped a westbound box car for a tour of the country’s bucket shops, trading all over the East Coast and Midwest. New York, Indianapolis, Chicago, St. Louis and Denver-Livermore won wherever he went, stashing away some $50,000. At that point, he headed for the big time-Wall Street, where they couldn’t turn you down, but where you actually had to buy the stock in order to play.

Livermore came to Wall Street in 1906 confident and ready to conquer. Too cocky for his own good, he lost it all in his first bust. Never being one to diversify and spread his risks, the ego maniac also didn’t understand how hard it is to build a big position. Buying stocks is different from reading the tape. If he saw a stock at 20 in the bucket shops and thought it would go to 24, he could “buy” at 20, and when it got to 24 he could “sell” for a 20 percent profit.

But on Wall Street he would take his $50,000 and plan to buy 2,500 shares of the stock. That was a hefty position in a market much smaller and less liquid than today’s, and the spread between bids and offering prices was often huge. It wasn’t abnormal to see a stock quoted at 20 bid, offered at 25-a 25 percent spread. Suppose he saw a stock that traded last at 20 but was quoted 19 bid, offered at 21. He started buying at 21, plus a commission. But then his own buying would drive the stock up. It might take him until 24 to get his entire position built. Then, if he thought it would fall and started to sell, it might be quoted at 23 bid, offered at 24. He’d then start selling but never get a better price than 23, less commission, and take a loss on his first sale. Then he would drive the stock down and take a loss on the liquidation of his remaining 2,500 shares. It’s a lot harder to make money in reality than it is to do on paper-something which few people today, except for institutional money managers, seem to fully realize. For instance, investment newsletters “manage” portfolios the same way Livermore traded the bucket shops. But actually operating off the newsletters’ advice is like Livermore‘s buying on Wall Street.

Livermore didn’t get that at first. He just thought he couldn’t read the tape fast enough on Wall Street. So, doing the only thing he knew to do, he headed back to replenishing his capital via the bucket shops. En route, the 29- year-old stumbled upon Union Pacific Railroad-on a lucky hunch. As Union Pacific rose, he sold short, anticipating a big swing. Then, just as he was about to be wiped out, his swing came in the form of the San Francisco earthquake, halting East-West money flow and sending the railroad plummeting! Livermore quickly covered his shorts, took a bundle, booming a second time.

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World War I interfered with his boom and his profligate spending! This time coffee was the culprit. Expecting a rise in coffee, Livermore loaded up on it-and, sure enough, it rose. But, his coffee profits were dripped dry when government officials frowned on wartime fortunes, voiding his millions in coffee contracts. Tough luck-he was broke a third time. With broker-supplied capital (Livermore‘s commission-generating trading was often more valuable to them on a leveraged basis than on a small amount of capital), he resurrected himself again, masterminding bear raids and bull runs successfully throughout the 1920s. But the 1929 Crash left him bust for good.

To make the magic happen between busts, Livermore didn’t wait for fate-instead, he used the media, mainly the New York Times, to move the market in his favor. For instance; while acquiring cotton in a rising market with few buyers, he assured his success via a 1908 article headlined, “July Cotton Cornered By Jesse Livermore. ” Never admitting to planting the article, Livermore reaped millions as new, excited buyers and panicked short- sellers scrambled to buy his holdings-at premium prices! The newly enthroned “Cotton King” followed three infallible steps during the next decade: (1) Gather a huge position whether long or short, (2) Publicize it, and (3) Unload on the suckers! Jesse, who detested shaking hands with men but loved touching women, believed the public was, on the whole, stupid. It somehow never seemed to dawn on him he was unscrupulous.

Recovering from a $3 million loss in grain in 1925, Livermore recouped by secretly heading a pool and pushing a stock from 19 to over 74 within a year. Even in the 1920s, when he lost, he resorted to bucket shops for quick cash. He also favored ﬁling bankruptcy to clear his debts, which once exceeded $2 million, although he regularly paid back most of his debts even after his bankruptcy proceeding was completed. One time-once was enough- he tried to resort to his ﬁrst wife’s jewels, asking her to hock what he had previously bought for her! When she refused, he packed up and left, divorcing her a few years later to marry an 18-year-old. He was 41.

(Arnold Bernhard, the legendary founder of the Value Line, once told me about working for Livermore during the 1920s as a statistician. Bernhard was young, eager, and inexperienced but observant. The main thing he noticed about Livermore was that he wasn’t observant. According to Bernhard, Livermore‘s vanity, even in his private oﬃce, got in the way of his ability to recognize reality.)

If the 1920s were Livermore‘s dream decade-lavish parties, estates, Rolls-Royces, two sons-the following decade was a quick lesson in reality. When the market bottomed after the Crash, he quickly followed suit. His sweet little I8-year-old second wife had since become an alcoholic and shot his favorite young son during a

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drinking binge. The son recovered, and Livermore quickly got rid of the wife and took a third. His career was equally dim. While he was never completely broke, the big time wheeler-dealer had to resort to trading in IOO- share lots and returned once more to the bucket shops, just before their SEC-caused demise. In 1933, he cracked up, holed himself up in a hotel room, drank for 26 hours straight, then stumbled bleary-eyed into a police station, claiming amnesia. A real basket case. But it doesn’t end here.

Haggard and worn out from too many icy-dry martinis, Livermore attempted to pawn his “secret” to success on the public, publishing How To Trade Stocks in 1940. Barely 100 pages, his flimsy and visually cheap book was available in two editions-a leather-bound volume or the “Anyman’s” edition. But putting leather on the outside wasn’t going to make this an esteemed item. It was a desperate last attempt at recovering his coveted reputation, and it showed. Despite his usual publicity efforts-big parties with free food and drink for the press- the book flopped, and Livermore finally fell over the emotional edge. Sipping two drinks in Manhattan‘s Sherry- Netherland Hotel, he penned an eight-page letter reiterating “My life has been a failure” to wife number three (who reputedly would have been out, had the book been a success). Next, he ducked into the empty hat-check room, slumped into a chair, held a pistol to his temple, and rid the world of his future. Since he had claimed he didn’t want to die disgustingly rich, he may have considered himself a success.

Livermore‘s lessons? There are almost too many to list. He was among the most ﬂamboyant and famous of all market operators, and, amazingly so, for someone who deserved it so little. It was his ﬂash, extravagance, and publicity that caught attention. But when you think of him, it’s important to remember that it’s harder to buy stocks than it looks. Wild traders may make it on Wall Street, but they rarely keep it.”