Like Jesse Livermore
by Richard Smitten
220 pages, John Wiley & Sons; 1st edition (October 22, 2004)
List: $49.95; $32.97 at Amazon.com
As one of the first investors to utilize �technical analysis� to buy and sell stocks, Jesse Livermore made - and lost � several fortunes on Wall Street. He was as well known in his time as Warren Buffett is today.
Livermore�s investment philosophy was to focus on only two factors when making his buy and sell decisions, the stock price and the trading volume. He felt these two factors incorporated all the relevant information needed to make an investment decision.
Stocks trade on emotion, not on logic according to Livermore, therefore a fundamental analysis of financial data, news, rumors, and industry sectors are not needed. In his case he claimed that using fundamental information actually resulted in losses in his accounts, especially when corporate executives are not forthright with their reporting or public comments.
Trade Like Jesse Livermore
In a new book entitled �Trade Like Jesse Livermore� Richard Smitten highlights Livermore�s trading philosophy and strategy, and how he made a fortune using his system of technical analysis. Livermore developed his unusual strategy after working as a clerk in a Paine Webber office, posting trades on the stock boards and watching investor reaction in real time.
What we find interesting about the book is Livermore�s comments regarding situations where false rumors or the financial statements are not an accurate reflection of the state of the company � unfortunately not an uncommon situation in recent years. He claims the relying on the price action, not the underlying information, will give an investor a more accurate picture of company as a potential investment.
Livermore�s Investment Rules
Surprisingly we find that many of Livemore�s rules are �common wisdom� for many successful investors today. His rules include:
- Don't purchase a stock until the odds are strongly in your favor
- Cut losses quickly, even if you think investment decision is correct longer term
- Let profits ride if there is no good reason to sell
- Buy leading companies in leading industry sectors
- Use trading volume to confirm price signals
- Follow the trend, don't �fight the tape�
- Ignore rumors and tips
Livermore made a fortune in the 1920s utilizing a manual data chalk board and direct telephone connections to the exchanges, and the book makes clear the importance of timely and accurate information. Today's markets and Internet access, and the ability to use computers to analyze developments, allow the individual to successfully adopt some of Livermore�s trading patterns.
Technical & Fundamental Factors Statistically Significant
We don't buy stocks based on technical factors alone, but combine both fundamental and technical factors when assembling a portfolio. The attractiveness of a company as an investment can be �confirmed� by the technical action of the stock. And most importantly, an analysis of historical market data suggests both technical and fundamental factors play statistically significant roles in predicting a stock or portfolio�s future performance.
Smitten�s book documents some of Livermore�s unusual personal and business habits in addition to his investment strategy. A secretive American genius who loved investing, women, and wealth, who spent at least one weekend locked in a bank vault with his millions analyzing his trading patterns, he ultimately committed suicide after a run of bad luck.
An interesting read for anyone interested in investing and technical analysis, or in colorful personalities of America's past.
© 2004 Joseph Dancy
Bio & Archive
Web Note: Also hear Jim Puplava's interview with the author, Richard Smitten.