Lessons From The Greatest Stock Traders Of All Time

Lessons From The Greatest Stock Traders Of All Time

by John Boik


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The trading strategies of legends Jesse Livermore, Bernard Baruch, Gerald Loeb, and more provide ways to triumph in the market

Today's bookshelves are so laden with Johnny-come-lately experts, eager to sell their knowledge to any and all, that it's sometimes hard for traders to know which way to turn or whom to trust. Lessons from the Greatest Stock Traders of All Time makes the choice simple, examining the careers of five traders—Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, and Bill O'Neil—who, more than any others over the past century, demonstrated tremendous success at conquering Wall Street.

This technique-filled book presents numerous ways in which the timeless strategies of these investing icons can be used to tame today's high-speed, unforgiving marketplaces. Comparing and contrasting the successes—and occasional failures—of these five giants of finance, it reveals:

  • What Jesse Livermore did to correctly call every market break between 1917 and 1940
  • How Bill O'Neil stuck to basics to create his famously effective CANSLIM system
  • The strategies Nicolas Darvas used to become a self-made millionaire several times over

Product Details

ISBN-13: 9780071437882
Publisher: McGraw-Hill Professional Publishing
Publication date: 05/13/2004
Pages: 160
Sales rank: 814,232
Product dimensions: 6.10(w) x 8.80(h) x 0.30(d)

About the Author

John Boik is an active trader and former stockbroker. He is the former assistant controller and special finance project manager for Washington Mutual Finance. He lives in Atlanta.

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The McGraw-Hill Companies, Inc.

Copyright © 2004 The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-143788-2



Jesse Livermore

"It's not the thinking that makes the money; it's the sitting."

The Reclusive Genius

Jesse Livermore was born on July 26, 1877 in Massachusetts. He came from a poor family, as his father struggled as a farmer with the challenging New England soil. Young Jesse knew he wanted more from life, and when his father pulled him out of school to follow in his footsteps, Jesse ran away from home at the age of 14. With just a few dollars in his pocket—given to him by his mother—he headed to Boston. He landed a job as a chalkboard boy for Payne Webber that paid him the minimal wage of $6 per week. His responsibilities in his new job required him to post the stock quotes on big chalkboards covering the length of the brokerage house as prices were called out by tape watchers sitting in the gallery as fast as they could yell them out from the ticker tape machines.

Livermore always excelled at mathematics in school, and he found the tape of the Street to be his calling. He was truly gifted, with a photographic memory when it came to numbers. He actually performed three years of mathematics in one year of school during his youth. He would memorize prices and ticker symbols from his job at Payne Webber. He became a voracious tape reader and watched the tape with total concentration and focus. He also started to keep a notebook of the numbers from his chalkboard job, and he soon noticed that certain patterns emerged. He would keep thousands of price changes in this notebook diary and study them, looking for these certain price patterns. By the time Livermore was 15, he was seriously studying stock patterns and price changes. His "on the job training" allowed him to be ever observant of the activities and how people participated in the market. He noticed that most people lost money in the stock market because they acted randomly, did not act on rules or a predefined plan, and did not put forth the required study that the market and its actions required.

His first trade was made jointly with a friend. They invested a total of $5 in Burlington because Livermore's friend thought the stock would rise. They executed the trade with one of the "bucket shops" in Boston. The atmosphere within the shops was more conducive to low-budget speculation, as one was basically betting on the next move of the stock, or very short term trading. You could also bet on the movement of the stock without actually owning the stock certificates. If the stock moved against you by 10 percent, your trade was wiped out. This was the 10-percent margin rule that was in effect at the time, and it would establish a strict loss-cutting rule for Livermore that he adhered to most of the time during his trading career. Over time and due to experience, he would actually improve on this and he would be able to cut his losses to less than 10 percent.

Concerning Burlington, Livermore first checked his notebook and became convinced that the stock would rise based on its recent trading pattern. So his first stock trade took place when he was 15, and he ended up making a profit of $3.12 on his share of the trade.

He continued to trade in the bucket shops, and by the time he was 16 he was making more money trading than he was making at his job with Payne Webber. When he made a total of $1000 he quit his job to trade full time in the bucket shops.

Livermore made so much money by the time he was 20 that he was banned from the bucket shops of Boston and New York, as he was having an adverse effect on the shop owners' profits. (He would bounce back and forth between the two cities when he would be discovered in one or the other.) His success earned him the nickname "The Boy Plunger." Bucket shop owners wanted nothing to do with him, or his winning trades, which were constantly taking profits from their shops.

With his confidence high he decided to head to New York and trade the stocks on the listed New York Stock Exchange. After all, this was the big time and he was now ready to test his skills in the big league. He set up an account with a brokerage office with $2500 he had as his capital stake. This was down from a high of $10,000 he had attained at one time from his bucket shop trades.

As he lost his profits, Livermore learned the hard way that trading wasn't always easy. As a result, he started to analyze the mistakes he made that caused his losses. This detailed analysis of past mistakes would prove to be a vital trait of his later success. This also became one of his best learning tools.

One of the lessons he discovered during this first analysis period was he would become impatient and thought he had to trade. Impatience in the market usually leads one to making impulse trades, which rarely leads to profitable success. This mistake would cost him dearly, and it is a mistake made by many traders still today.

New York did not produce much success for Livermore. He went broke within six months and had to borrow $500 from his brokerage firm. With money in hand he headed back to the bucket shops to regain his stake. He discovered that the bucket shops would quote prices instantaneously, whereas there was a delay in the New York quotes. His system at the time was based on instant quotes and quick trades. He returned to New York in two days with $2800 and repaid the $500 loan to the brokerage firm.

But upon his return he found it more difficult than he had expected and still found he was only able to break even in New York, so he returned for a final time to the bucket shops. Just when Livermore successfully brought his account up to $10,000 by trading in disguise, the bucket shop owners finally discovered him again and he was banned for good from the shops.

In 1901, now in New York and trading stocks listed on The New York Stock Exchange during a strong bull market, Livermore went long (bought) on Northern Pacific, and he turned his $10,000 into $50,000. Then just as quickly, he gave it all back on two short positions (borrowing stock from your broker in hopes of buying it back at a lower price and profiting from the difference), as he thought the market would break for a short time. Though he lost on these two trades, he was initially right, but the delays due to the huge volume in trying to fill the trades caused his losses when the stocks reversed on him.

It was from this experience that he learned how difficult very short term trading was going to be on The Big Board. Livermore realized he had to learn how to adapt to the different trading environment that separated the instantaneous action of the bucket shops when compared to the more sophisticated processes of organized trading. So once again, by the spring of 1901, Livermore found himself broke. He then discovered a new hybrid bucket shop that had opened for business. He thought he could regain his stake quickly if he traded in these hybrids. For almost a year he successfully regained his capital until he was discovered and banned from these shops as well.

Through it all, the losses Livermore endured taught him that one must experience losing real money in order to learn the correct ways of the market. He stayed persistent in his pursuit of success and kept learning from his mistakes and experience.

It was also at this time that he discovered the time element. The time element in stock trading means that it takes patience, and the road to profitable trading will occur over time, as in trying to master most pursuits. It can also mean understanding how stocks trade. In the bucket shops, the time element was very short and instant, due to the more gambling nature of how the bucket shops were set up and how they operated. In New York the time element meant there was more of a delay as opposed to instant transactions. There was also the fact that once you purchased a stock on The Big Board, you actually took possession of the certificates reflecting the company in which you owned the stock. This time difference between how the bucket shops operated and how The Big Board operated meant one had to react more to future time. This required patience, which would become a strong trait of Livermore's years later and would lead to some of his largest gains. The time element also proved to him that the road to success in stock speculation was indeed going to happen over an extended period of time. It would not happen overnight.

He was certain of this because he had already experienced many ups and downs when it came to his own capital. He achieved some milestones early on. By the age of 15, he made his first $1000. Before turning 21 he made his first $10,000. He got his account up to $50,000, and then gave it all back two days later. He was experiencing the usual ways of the market, but he was determined to stay persistent, as he knew the life of the market was to be his calling.

Livermore made a definition at this point. He defined gambling as anticipating the market, which was very difficult to do, and he saw the odds as being stacked against the individual trader. He defined speculating as having the ability to be patient and react only when market conditions give you the signals to speculate. Here in his early years, he was constantly learning new skills required to achieve great success in the market. He kept refining his rules as he stayed observant and persistent.

Livermore was, at this time, by no means an expert. He kept listening to others and their so-called "tips." He also kept trading too much. Another mistake he was making was taking his profits—especially in a bull market—way too early. At this time he also discovered the importance of the general market and how important it was to learn and understand what the market is doing overall and how it affects most stocks. He had to learn how to interpret what the market was currently doing and at what stage it was currently in, instead of trying to predict what it was going to do in the future.

During these early years Livermore was in a constant learning mode. He discovered that being impatient in the stock market is one of the biggest mistakes one can make. Through experience he would learn to trust the faith in his own judgment. His constant observations would lend credence to his judgment and not allow him to be distracted by the minor fluctuations that would always occur in the market.

Through experience, his strategies began to work and, at age 30, he was becoming more successful in his trading. At this time he developed his probing strategy (discussed in more detail later in this chapter). The other key strategy he implemented was his pyramiding strategy.

Pyramiding was a strategy that would also become a key trading rule of all the other great traders profiled in this book as well. Pyramiding was buying more of a stock as it kept advancing in price. Imagine how different this strategy must have seemed in those early years, as most people are taught to purchase things at lower prices in order to get a bargain, as opposed to paying higher prices. This concept of adding to your most recent purchases when they prove you were right compounds your returns. Livermore discovered that after he would purchase a stock from observing its price action, if the stock kept increasing in price, the action of the stock was proving to him that he had made the right decision. This confirmation of his correct decision was proof enough for him to continue purchasing more of the stock. This compounding effect would only add more to his increasing gains on those particular stocks.

Livermore used probing and pyramiding strategies on the short side of the market in late 1906, as the market was having difficulty keeping a sustained rally in an upward trend. Here he would add more to his short positions as a weak stock kept declining in price. He had so much success being short in the market during the beginning stages of the bear market of 1907, that he had become a millionaire before he turned 31.

Livermore called the crash of 1907 and made $3 million in a single day on October 24th, as he closed out and covered his short positions. In October 1907, J.P. Morgan, then the most influential person on the financial scene, saved Wall Street from near collapse as he injected the market with the required liquidity needed to continue as a viable institution. Morgan even sent a personal message directly to Livermore requesting that he stop shorting the market. The fact that the great J.P. Morgan acknowledged Livermore's action in the market was a true testament to the reputation and impact that Livermore was gaining on the street.

The Great Bear of Wall Street

By this time, Jesse Livermore was indeed establishing himself as a prominent figure on Wall Street. His newfound wealth made Livermore discover that the big money was made in the big swings of the market, earning the nickname "The Great Bear of Wall Street" from his shorting positions that earned him a fortune in the crash of 1907. Throughout these winning years, Livermore reiterated his belief in never-ending stock market analysis and its essential importance to success.

From his successes in the stock market, he began to speculate in the commodities market as well. He became involved with Percy Thomas, who was considered, at that time, the Cotton King. At the time he started socializing with Thomas, Thomas had lost all of his fortune on a few bad trades. But Livermore listened nonetheless, as he knew of Thomas's prior success and that he was still considered the legend of cotton. Thomas convinced Livermore to take a certain position in cotton. As Livermore soon found out, his long position in cotton would cost him nearly his total fortune. He lost many of the millions he had built up on his profitable trades with this transaction on cotton—largely by breaking many of the market rules he spent so much of his early years developing.

Livermore broke his own rules of playing a lone hand and not listening to others. He also broke his loss-cutting rule, as he kept holding on to a losing position. This experience cost him emotionally as well. As he tried to get his money back, he lost even more money in desperate trading. By this point, Livermore was now deeply in debt to many creditors. This only furthered his depression and he began to lose his confidence, which is devastating to a stock trader.

It took many years for Livermore to get back to his winning ways. The markets were mostly flat to down in the years from 1910 through 1914 (the market was actually closed from August 1914 to mid-December 1914 due to the beginning of World War I). Livermore, at this time, was broke, depressed, and owed creditors more than $1 million. The market also offered no great opportunities during these flat years. In order to clear to his head and get back into his game, he decided to declare bankruptcy in 1914. Still down on his luck, in 1915 during a war-time rally in the market, he was given a line of 500 shares with an unlimited price per share from one of the brokerage houses he traded with. For six weeks he did nothing but study the market and watch the tape. He noticed that certain par levels would be established by a stock. This was an old trading principle that he actually used in his bucket shop trading days. A par level would mean that when a stock rose to a round number such as $100 or $200 per share, it more than likely would keep increasing in price as it cleared this par level.

He bought Bethlehem Steel at $98 and watched it passed through $100 and kept rising. He bought another 500 shares as it hit $114 per share. The next day it hit $145 and he sold out for a profit of $50,000 on the 1000 shares. This transaction helped him regain his confidence and got him to stick to his rules again. He brought his account up to $500,000 at one point, and he finished the year of 1915 with $150,000 in his account.

By the end of 1916, Livermore had started shorting the market. The market soon began to decline. Many leading stocks had topped and started to decline in price when the famous "leak" spread that President Wilson was set to offer a peace plan to the Germans. Wall Street would view this as a negative event because it would hurt the wartime economy of supplying goods to foreign nations. Bernard Baruch (featured in Chapter 2), who had become a friend of Liver-more's, was also short in the market at this time and was rumored to have made $3 million on the news leak. A Congressional committee was formed to investigate the rumor leak, and Baruch and Livermore were called on to address the committee. Baruch had admitted that he made $470,000 on his short positions during this time, but he vowed it was not due to having advanced information of the rumor. The New York Stock Exchange nonetheless enacted a new rule stating that it was not proper to trade on news leaks. Of course, this ruling was difficult to enforce but it showed the influence of Livermore and Baruch on the market at that time. Livermore himself cleared approximately $3 million in 1916 by being both long during the rising part of the year and short during the later few months, in which the market turned sharply downward.

On April 6, 1917 the United States entered World War I, and after many successes in the market Livermore would begin to pay off all of his previous debts, even though legally through his 1914 bankruptcy filing, he was not obligated to do so. He also, at the age of 40, established a trust account to insure that he would never go broke again.

Regaining Prominence

By 1917 Livermore was now gaining back his once prominent reputation on Wall Street. On May 13,1917 a New York Times article ran called "Exit the Swashbuckling Trader of Wall Street: Present Day Speculator in Stocks Is More of a Student and Economist Than the Sensational Manipulator of Other Years." The article featured both Jesse Livermore and Bernard Baruch and further identified them as major players and influential and successful stock traders on Wall Street.

During the 1920s Livermore determined that experience was one of the key essentials for continued success in the market. His reputation as one of the best and most successful traders on the street was increasing. He was truly living the American dream, becoming a very wealthy man by following his trading rules. He always considered himself a student of the market and thought it was a continuous learning process. Livermore was convinced that no one could ever master the market.

At about this time he began to find out how important it was to discover which stocks were the real leaders of a strong market movement. He would continuously study how leaders would stand out from the crowd and become the real price gainers. His study of the tape and improved understanding of how the market worked led him to refine his industry leader's approach. He would discover that each new major uptrend in the market would produce these new leaders in new leading industries, usually based on the greatest profit expectations. This reiterated to him the importance that fundamentals have in the market and on stock prices. His other discovery of how certain stocks act alike in the same groups and how the leading groups act in conjunction with the general markets would be a key to his even greater success that was coming his way in The Great Crash of 1929.

Excerpted from LESSONS FROM THE GREATEST STOCK TRADERS OF ALL TIME by JOHN BOIK. Copyright © 2004 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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Table of Contents




1 Jesse Livermore          

2 Bernard Baruch          

3 Gerald M. Loeb          

4 Nicolas Darvas          

5 William J. O'Neil          

6 Strategies of the Greatest Traders          




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