MacroProfit June 2014: Trade Like Livermore

It was an epidemic that hadn’t been seen since the Dark Ages. Influenza-the Spanish flu- took the lives of 3% of the world’s population (3%-between 50 and 130 million people!). The wounds from the 1920-21 depression were still fresh. World War I, which ended in 1918, claimed the lives of a million people.

From 1906 to 1924 the market was wrapped in a secular sideways market. Earnings grew about 2.5% , offset by an equivalent price-to-earnings decline which, after eighteen years of a lot of volatility and no returns, bottomed out at about 10-11 times.

Jesse LivermoreCollectively none of this could stop the Dow from appreciating almost five fold in five years, 1924-1929.

The 1924-1929 bull market was rigged by stock manipulators. The market would have likely gone up. The valuations were low and the economy and earnings were growing, but likely not nearly as much. Ninety-some years later the market is still (or at least perceived to be) rigged by high-frequency traders; and short-and long-term rates in the bond market are manipulated by the Federal Reserve (and other central bankers) by QE’s, which also inflate stock market valuations. If we look at the whole thing it all looks like it has been rigged by governments that are trying to stimulate themselves out of trouble. And of course, the 1924-1929 bull market was followed by…a precipitous, almost 80% drop in the stock market.

Does any of this matter to the trader? The answer is no. Whether it was 1924-1929 or 2014, trading is in the here and now. Unfortunately the words investing and trading have been jumbled by the media to the point that it is hard today to tell one from the other.

Therefore, in this time of great apathy towards risk I thought we could all be best served by “channeling” the greatest trader, not investor, of all time, Jesse Livermore to teach us how to trade in order to make money.

After all, “It’s All About Money” and the name of the newsletter is macroPROFIT.

Welcome to this month’s issue entitled:


“There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Most people lose sight of the fact that all markets are simply a collection of opinions which are brought together under one roof. If rates are going up then we must be short bonds and if they are going down we must be long. It sounds so simple when stated that way.

During Livermore’s era there were no faxes, texts, emails, internet or high frequency trading that gathered the collective opinions and were acted upon in a fraction of a second. Sometimes the events that transpired, to effect pricing, were not known for days and sometimes weeks later.

“The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now-not tomorrow. The reason can wait.”

Today however we are both aided and encumbered by instantaneous information.

That would lend one to believe that since technology has changed so to should we change the way we trade. Nothing could be further from the truth.

We are also offered varying instruments to select from which were not available in the past. This further complicates matters as some vehicles are not exactly what they are advertised to be. Is a bond fund really a collection of bonds? Is paper gold really the equivalent of the precious metal. Do derivatives hedge positions or create more leveraged risk. Do options mislead the market as to participation. Are record margins a true indicator of risk or does it all pale in comparison to shadow banking.

Livermore was never confronted with these issues. But I am convinced he would label everything as distractions. It was something to be aware of and used, but not to be allowed to influence the ultimate goal of making money through trading.


“There is the plain fool who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily-or sufficient knowledge to make his play an intelligent play”

The TBTF’s and the HFT’s will play the market on a daily basis and in many instances by the hour and often by the minute. Please keep in mind that they are privy to a sugar daddy called the Federal Reserve who is available 24-7 to be a supplier of capital. You, however, do not have that luxury. In addition most of those entities, because of size can profit from the scalping of an eighth or a quarter.

Another famous character of that era, Arnold Rothstein, (fixer of the Black Sox World Series), was once asked why Arnold_Rothsteinhe wasn’t betting today. He responded that he only placed a bet when the odds were in his favor. If they were not then he would take a nap. Rothstein slept a lot.

“My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.”

Sometimes patterns occur in channels. Ex. Most recently the ten year Treasury has been channeling between 2.5% and 3%. When the lower end of the channel is reached determine the total size of position that you are comfortable with and assume 20%.

“They say there are two sides to everything. But there is only one side to the market; and it is not the bull side or the bear side, but the right side. A man must believe in himself and his judgment if he expects to be successful. I am only right when I make money. That is speculating.”

Make no mistake, trading is speculating.

“I can’t tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.”

Why only 20% if you are convinced that the next move for rates is going to be up? The reason is simple as Livermore showed again and again. The market must confirm that you are right and nothing else. If you are wrong then only 20% of your capital is at risk. However, if you are right then buying at higher levels allows you to accumulate knowing that you are building on profits. Ideally the sequence should be 20-20-20-40 until you’ve accumulated your 100%.

This strategy of continuing to feed a winner is in total contradiction with the gurus on Wall Street and in the media who continue to advocate averaging down or buying more shares with the same amount of money. Livermore believed that this approach was simply feeding one’s ego at the expense of his pocketbook.  If you’ve made the wrong decision it may be because the timing is not rate. Therefore a nap is in order until the timing is right. The act of averaging down makes one feel better about the error of his ways.

“If a stock doesn’t act right don’t touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.”


“The big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend… It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

Livermore believed that there was a fine line between being right and being timely. He found that traders who could be both right and sit tight were uncommon. The usual tendency is for impatience to creep in as the market takes its time about doing what the trader figured it must do.

The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. You must not only have the courage of your convictions but also the intelligent patience to sit tight.

Perhaps the most difficult area to exercise patience in is when markets make their change from bull to bear. The greed factor, which is as prevalent today as it was in 1929, is so overwhelming that it can bring strong men to their knees. Perhaps the trader was late to the game. Maybe he has debts that can be easily handled by making one more trade. Or he just believes that this time it is truly different.

“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth. This is the most expensive eighth in the world. This has cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”

The battle between knowing that a sea change is coming and being able to resist the sirens calls to stay in is almost impossible. Having a past experience of losing during the shift from bull to bear would seem to be enough of a protection. Sadly the tail end of what has been has more allure than the beginning of what will be.

“You must hold in the bull market until you believe you are NEAR the 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.”

Patience is understanding the circumstances that affect the markets and then waiting until it is clearly obvious that the market will respond to the sea change. Once you are sure go into action. Much depends upon beginning at exactly the right time. But always remember the Livermore cardinal rule-after the initial transaction, don’t make a second unless the first shows you a profit.


Livermore once said, “An investment is a trade gone bad.” What was meant by that statement? He was fully aware that he was not always going to be right. When that happened he was comfortable losing 10% a number that he lived hard and fast buy, sometimes. There were times that Jesse was so convinced of the sea change that was coming that he watched profitable positions get cut in half. It took incredible courage to have that kind of conviction in his belief. (Later we’ll take a look at his biggest speculation and examine the results). Remember, however, he only initially positioned 20% of his total.

“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.”

Remember this is not about income. Much is made about dividends.

This is not about dividends. This is not about securing a steady return on your money at a good rate of interest. This is not about becoming best friends with the thing that has taken the place of your cold hard cash. This is trading, pure and simple.  It’s about getting back more than you started with by profiting from either a rise or fall in the price of whatever you may be speculating in. Remember, investing is not trading.


Most people think that controlling the situation is impossible since the advent of high frequency trading and computers have dominated the landscape. Control, however, is not about what is going on around you. It is about controlling you. First and foremost is to understand that trading should never be implemented until all the components of income, guarantee of principle, and emotional security are in place. Even the great Jesse Livermore bought a million dollar annuity for his wife in the event that something went awry. Once that is secured then trading becomes a lot less pressurized

Livermore was controlled by certain rules such as never trading at limits. “When you want to get out, get out.” Of course market conditions were not always what Jesse thought they would be. “The only thing to do when a man is wrong is to be right by ceasing to be wrong.”

Livermore was always in control. Perhaps a better way to say it is that he practiced discipline.

“My greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money. I was no longer betting blindly or concerned with mastering the technique of the game, but with earning my successes by hard study and clear thinking.”

In other words, Livermore was in control, of himself.


Today most people are amazed at the continuation of the up market. They look around and are convinced that any day the fundamentals of the world from high unemployment to military adventurism will be reflected in lower asset prices. I admit freely that I am in that camp. However Livermore saw his share of so called narrow markets, when prices were not getting anywhere to speak of but moved within a narrow range. What was/is a trader to do?

“There is no sense in trying to anticipate what the next big movement is going to be-up or down. The thing to do is to watch the market and make up your mind that you will not take any interest until the price breaks through your limit in either direction. A speculator must concern himself with making money out of the market and not insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations. Stock market post-mortems don’t pay dividends.”

Livermore was continually looking for the path of least resistance. Today that type of trading is called “momentum.”

“I merely learn the way prices are most probably going to move.”

Obviously conditions must be different today than during Livermore’s time. Or are they?

“Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”


Currently main stream media tells us that some sort of bell will go off when the sea change has occurred. People, as always, believe that this time they will exit to the sidelines with the fruits of their labors during the bull market. Unfortunately there may be a bell but there is no on there to ring it.

“A market does not culminate in one grand blaze of glory. Neither does it end with a sudden reversal of form. A market can and does often cease to be a bull market long before prices generally begin to break.”

Currently many traders have enjoyed a run over the past few years and in many instances not due to their own skill level. I am in this instance referring to those who have speculated in the housing market. It always seems that those folks count and even spend the appreciation well in advance of any final action on their part.

“No profit should be counted safe until it is deposited in your bank to your credit.”


“When a man is carrying his full line of stocks, he must be on the watch for an opportunity to change his paper profit into actual cash. He should try to lose as little of the profit as possible in the swapping. Experience has taught me that a man can always find an opportunity to make his profits real and that this opportunity usually comes at the end of the move.”

Livermore built positions over time. His philosophy of only adding on after he had achieved a profit dictated the he was looking to hit the homerun and not the single or double. This meant that he was always tuned in to the events of the day and how they HAD impacted the markets in the past and therefore how they WOULD impact them again.

“Observation, experience, memory and mathematics-these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or on the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities-that is, try to anticipate them.”

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


“History repeats itself all the time in Wall Street.”

“Facts are facts and the strongest of all allies are conditions.”

“Courage in a speculator is merely confidence to act on the decision of his mind.” 

“My business is to trade-that is, to stick to the facts before me and not to what I think other people ought to do.”

“Fear and hope remain the same; therefore the study of the psychology of speculators is as valuable as it ever was. Weapons change, but the strategy remains strategy, on the New York Stock Exchange as on the battlefield.”

“The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.”

“Stock are manipulated to the highest point possible and then sold to the public on the way down.”


On October 29, 1929, Jesse Livermore cashed out his positions in the stock market. He had gradually built his positions over a period of time. Never going forward until it was assured he would not go back. He patiently built positions all with an eye to the sea change that he believed was coming. Periodically he saw opportunities for small profits. However Jesse knew that this sea change would be so dramatic that he did not want to lose his position no matter how tempting it was. He knew it was coming. He just didn’t know when.

His cash out on that day was for a profit of over $100,000,000. It was quite a handsome sum for today but for 1929, extraordinary.

Jesse Livermore would be salivating if he were alive today. The leverage, indebtedness and manipulation being exhibited today portends an event that will make that day in October 1929, pale in comparison. Jesse would have not been afraid of it. He would have embraced it for the opportunity that it was.

If you have your finances in order, meaning cash flow, liquidity, safety and state of mind then you can start (and I emphasize start) getting ready for the opportunity of a lifetime.

Success can be yours if you TRADE LIKE LIVERMORE.

Till next time and good trading.

‘Til next time,




MacroProfit is for education and entertainment purposes only. The information contained within is not a recommendation to buy or sell securities. All individuals possess different risk tolerances and should consult an advisor before making any transaction to ensure it fits their financial goals. Furthermore, individuals should understand the tax consequences of any investment and should speak with their tax advisor before making any transactions.
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With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.