3 Things Investors Can Learn From Jesse Livermore | Exploring Markets

3 Things Investors Can Learn From Jesse Livermore

Jesse Livermore got rich early in his career. He shorted the notorious market crash of 1907. During that time, the market crashed 50%. Livermore was rich. He made $3 million during the entire crisis and if you adjust that for inflation it's about $75 million today.

But here's the thing.

One year later, Livermore was $1 million in debt. He had lost it all. Imagine if you had $75 million. What would you do with it? How would you put it to work? It's in this story where the great lessons from Livermore come from and how all investors can learn from him:

1. Jesse Livermore lost $75 million in just one year. But how? Because he violated his own trading and investing rules. Livermore had guidelines for himself. One of those was really simple, too. He said, "never listen to other people's advice." When Livermore became rich, he started to listening to other people's investing advice. This went against the system that made him rich in the first place. If you're going to invest or trade, you need to have conviction about your own ideas.

2. Risk management is everything and Livermore lost his entire fortune because he had no risk management. Livermore lost 90% of his fortune on one really bad trade. In financial markets, no one should ever risk their entire portfolio on one position. In other words, no single position should ever be large enough to make you go completely broke. The point of investing is to outlast everyone forever.

3. As the story goes, Jesse Livermore began conversing with an investor known as The Cotton King. He earned this name because of his recent calls on cotton and how it would trade. Livermore, at the time, was shorting cotton. But he began talking with The Cotton King who was bullish on cotton. These conversations eventually taught something profound to Livermore. He grew uncertain about his short position, changed his mind, and went long cotton with The King. Over the next few months, cotton crashed and Livermore lost it all. Livermore's quote about this moment goes like this, "A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for it means that he cannot trade with confidence and comfort."