Guest Column

‘I’m not gambling, I’m speculating.’ A cautionary tale

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There are many famous investors.   Some, like JP Morgan, Henry Dow and the celebrated Warren Buffett are household names; others are less known. This is a story about one of those lesser-known capitalists, Jesse Lauriston Livermore. Livermore was a legend in his own time, both reviled and exalted. He made and lost fortunes trading stocks, filing for bankruptcy on three occasions. Interestingly, he had as many bankruptcies as he had wives. 

Livermore was born to a poor family in Shrewsbury, Massachusetts, in 1877.   At the age of 14, he went to work for Paine-Webber. He posted stock quotes on the board for $5 a week. He was well- liked and might have risen up the ranks of the company, but he preferred to trade on his own account, and he did not care much for the traditional broker houses.  Livermore preferred the “bucket shops.”   At the time, the “bucket shops” allowed speculators to bet on the price of a stock.   You did not actually buy the stocks, you just bet on whether they would go up or down, sort of like modern options trading.  At the age of 15, he made his first bet, placing a week’s pay on the Chicago, Burlington and Quincy Railroad to go up.  He made $8.12 on the five-dollar bet and he was hooked.  He quit his job at 16.  The next year, he presented his mother with a thousand dollars.  She protested that she disapproved of his gambling.  Livermore responded that he was not gambling, he was speculating.

Livermore made his first truly big score in 1901, turning a $10,000 investment in the Northern Pacific Railway into half a million dollars.  In 1906, he shorted shares of the Union Pacific Railroad just days before the San Francisco earthquake making a profit of $250,000.  During the infamous Panic of 1907, he was said to have made a million dollars on short positions in a single day.  When JP Morgan urged him to close his shorts for the good of the country, he did, making another three million on the rebound.  Astoundingly, one year later, he was bankrupt. He recovered and then went bankrupt again in 1915. When his first wife refused to pawn the expensive jewelry, he had lavished on her to bail him out, he divorced her.

At the end of World War I, Livermore set out to corner the cotton market. He would have done it, but President Woodrow Wilson, concerned about the effect Livermore’s actions would have on the economy called him to the White House and pleaded with the speculator to sell his cotton at cost.  Livermore agreed. When Wilson asked him why he had set out to corner the cotton market, Jesse Livermore responded “to see if I could, Mr. President.” During the Roaring ’20s, he manipulated the wheat market and made $10 million by engineering a short squeeze on the stock of Piggly Wiggly. 

In 1929, Livermore decided the markets were overpriced.  He began to short stocks using multiple brokerage firms to hide his actions from the public. The market kept rising and at one point he was down over $6 million, but he stuck to his convictions and when the markets crashed in October of 1929, he made a profit of over $100 million. The media hailed him as “The Great Bear of Wall Street.” Many, in the public, blamed him for the crash. He received numerous death threats.

Five years later, he was divorced for a second time, and astoundingly, he was filing for bankruptcy a third time. He had somehow managed to lose $100 million in half a decade. It is unclear how he lost that money or how he recovered, but by 1937, he had made enough to pay off the $800,000 he owed to the IRS. 

In 1940, just after Thanksgiving, Livermore shot himself in the cloakroom of the Sherry-Netherland hotel in Manhattan. He left a note for his third wife, whose fourth husband had hung himself after the 1929 crash, declaring himself a “failure.”

Scott A. Grant is an author, historian, and columnist.  By day, he manages assets for those who trust him at Standfast Asset Management of Ponte Vedra Beach.  He welcomes your comments at scottg@standfastic.com

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