Jesse Livermore was one of the most renowned traders and investors of the early 20th century.
Born in 1877, Livermore started his career as a chalk boy in a brokerage firm, where he learned the ins and outs of the market.
Many of today's young investors may not be familiar with chalk boys.
Chalk boys are employees of a stock brokerage firm who periodically write quotes of approximately fifty leading stocks on a large blackboard.
Chalk boys are now obsolete and are no longer needed with the advent of modern electronic quotation systems in the brokerage industry.
Over time, Livermore developed his own trading strategies and became famous for his ability to predict market movements and make substantial profits.
Livermore was more of a trader than a fundamental investor.
His life was marked by both incredible successes and devastating failures.
He made and lost several fortunes throughout his career, but his experiences in the market taught him valuable lessons that are still relevant today.
Respect the Market
Livermore understood the importance of respecting the market's power and unpredictability.
He emphasized the need to approach trading with humility and caution, knowing that even the most seasoned investors can be humbled by the market's movements.
The market can remain irrational longer than you can stay solvent.
Study Price Action
Livermore was a master of reading price action and market trends. He believed that price movements revealed valuable information about market sentiment and future direction.
Livermore's approach focused on understanding market dynamics rather than relying solely on fundamental analysis.
A basic understanding of price action and market trends is useful for even fundamental investors.
Follow the trend
Livermore is credited for saying, "The trend is your friend."
He understood the importance of following the prevailing market trend and avoiding fighting against it.
Livermore's trading strategies often involved identifying trends early and riding them for maximum profit.
Though fundamental investors are advised not to time the market, technical investors do so.
Cut losses quickly
Livermore recognised the importance of cutting losses quickly when trades went against him.
He understood that accepting small losses early on was essential to preserving capital and avoiding catastrophic losses.
The legendary billionaire investor Warren Buffett highlights his fundamental investment philosophy with both wit and clarity - "The first rule of an investment is don't lose money. And the second rule of an investment is don't forget the first rule. And that's all the rules there are."
Let profits run
While Livermore advocated for cutting losses quickly, he also believed in letting profits run.
He understood the importance of maximizing profits when trades moved in his favour. Livermore was known for holding onto winning positions for as long as the trend remained intact.
Manage risk
Livermore was acutely aware of the importance of risk management in trading.
He advised traders to never risk more than a small percentage of their capital on any single trade and to diversify their investments to spread risk.
Livermore understood that managing risk was essential to long-term success in the markets.
Stay disciplined
Livermore stressed the importance of discipline and emotional control in trading.
He believed that successful trading required the ability to remain calm and rational, even in the face of uncertainty and market volatility.
Livermore's discipline allowed him to stick to his trading plan and avoid making impulsive decisions based on fear or greed.
Self-discipline is a mind game that is easier to think of than to practice.
Learn from mistakes
Throughout his career, Livermore experienced both triumphs and failures.
He understood that mistakes were inevitable in trading but believed that they could serve as valuable learning experiences.
Livermore encouraged traders to analyse their mistakes objectively, learn from them, and adapt their strategies accordingly.
The only mistake that will forever remain a mistake is that from which you do not learn anything.
Adapt to changing market conditions
Livermore recognised that the market was constantly evolving, and successful traders needed to adapt to changing conditions.
He was known for his ability to adjust his strategies based on shifting market dynamics, allowing him to stay ahead of the curve and capitalise on emerging opportunities.
Stay Humble
Despite his success, Livermore remained humble and recognized that there were always new lessons to learn in the market.
He advised traders to approach the market with an open mind and a willingness to learn from both successes and failures.
Despite his knowledge, the successful investor will always have the humility to be aware that there is much that he does not know or understand.
Jesse Livermore's life and career offer valuable insights into the world of trading and investing.
His timeless lessons on respecting the market, following trends, managing risk, and staying disciplined are as relevant today as they were during his time.
By studying Livermore's approach to trading, investors can gain valuable insights into how to navigate the complexities of the market and improve their chances of long-term success.
*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market.
