February 1907 - exactly one century ago - was an exciting year for Jesse Livermore. In 1906, he had hit the big time - profiting by over a quarter million dollars - by shorting the market just before the San Francisco earthquake. It was at about this time that Livermore consciously began changing his trading style. He decided that the key to success lay in studying the market as a whole rather than in following individual stocks. According to Reminiscences of a Stock Operator, he said:

“I began to see more clearly—perhaps I should say more maturely—that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.

“I studied the situation in 1906 and I thought that the money outlook was particularly serious… It was good hard cash that went up in cannon smoke in the Boer War, and the millions spent for feeding nonproducing soldiers in South Africa meant no help from British investors as in the past. Also, the earthquake and the fire in San Francisco and other disasters touched everybody… I figured that nothing could stave off one peach of a smash. Such being the case there was but one thing to do - sell stocks!”

Unfortunately for Livermore, every time he began to sell stocks, the market rallied. Bit by bit, the money he gained from shorting the market in 1906 was lost. Convinced that the market should fall, he continued taking short positions, only to lose. Before long, he was cleaned out. He commented:

“That is how I came to learn that even when one is properly bearish at the very beginning of a bear market it is well not to begin selling in bulk until there is no danger of the engine back-firing.”

Despite Livermore’s losses, his broker was willing to extend him credit - Livermore was one of his most profitable customers. Then Livermore saw something that further convinced him that the market was truly going to collapse. The Northern Pacific and Great Northern announced new issues of stock. They did it in a way Livermore had not seen before. They were going to allow buyers to pay by installments. This, concluded Livermore, meant the financiers didn’t think there was enough money in the markets to absorb the stock issues.

Livermore explained this reasoning to his broker, who extended him the financial backing he needed to begin shorting the market.

“I profited by my earlier and costly mistakes and sold more intelligently. My reputation and my credit were reestablished In a jiffy. That is the beauty of being right in a broker’s office, whether by accident or not. But this time I was cold-bloodedly right, not because of a hunch or from skilful reading of the tape, but as the result of my analysis of conditions affecting the stock market in general. I wasn’t guessing. I was anticipating the inevitable. It did not call for any courage to sell stocks. I simply could not see anything but lower prices, and I had to act on it, didn’t I? What else could I do?”

One by one, the stocks that Livermore had shorted began falling and, before long, all were falling.

“I had a wonderful time after that, and in February of 1907 I cleaned up… I went to Florida. I love fishing and I needed a rest. I could get both down there.”

Sounds to me like a nice way to spend February.

It’s interesting to see today’s writers still referencing Jesse Livermore.

Nils Pratley, writing in January’s Guardian quoted Livermore:

“Being wrong is acceptable; staying wrong is unacceptable.”

Nils’ article was entitled “My tip is don’t take tipping seriously“. Of course, this was one of Livermore’s favorite themes. Having been badly stung acting on a tip from Ed Harding; Livermore established it as one of his cardinal rules that he would never again act on anyone else’s stock tips.

On January 29, Jesse gets another mention - albeit a misinterpretation - in an article entitled Value Investing, Patience and Shakespeare.

“It was never my thinking that made big money for me. It was my sitting tight.”

The author believes the above quote from Livermore helps support the view “that it is time in the market that reaps substantial returns, not timing”. Of course, Livermore’s stock strategy relied entirely on timing. When he talked about sitting tight, he meant sitting tight until the bull market was over - then you need to sell. Here are some thoughts from Livermore about sitting tight:

“In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see—or if you prefer, until you think you see—the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth—or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”

Jesse also gets a couple of mentions in an article entitled US Housing Slump Continues. He is quoted:

“In a bull market and particularly in booms the public at first makes money which it later loses simply by overstaying the bull market.”

Jas Jains, the author, concludes his article, in finest Livermore style, “Not much has changed in hundred years, or hundreds of years. The bubbles expose the suckers among us! And Silly.con Valley is overflowing with them. It would prove to be a fine example of Easy Come Easy Go.”