Turbo-charge your drive to a million
Impressively, he achieved that vast sum in 1929 and the $100 million is roughly equivalent to $1.3 billion today.
I believe Jesse Livermore's hard-won stock-market insights are incredibly useful for today's investors. But despite his impressive gains, investors sometimes overlook him because he eventually lost his fortune the way he made it.
Indeed, he had a taste for the high life and an unfortunate depressive condition that may have affected his judgement and contributed to his eventual downfall.
But he wasn't an uninformed 'stock jock' and, if we can look beyond his colourful character, there is a lot to learn from the advice he penned in the book How To Trade In Stocks and from Edwin Lefevre's book Reminiscences Of A Stock Operator, which the author based on interviews Livermore granted.
What really impresses me about Jesse Livermore is the great effort he put into learning from his mistakes. He lost his fortune several times, but applied his lessons, and his determination, to succeed again.
A three-part strategy
Jesse Livermore followed economic- and company-specific events and used the knowledge he gained to make his decisions. However, he also believed share-price movements often preceded news, and so timed his investments according to the market 'action', recognising that investors could be right in their reasoning but could be wrong with their timing -- and thus end up losing money.
He eventually refined his investment strategy into three parts:
- Money management
- Emotional control
Timing was the most important factor of all to Jesse Livermore. He said:
"The only time to buy is when you know they will go up. When you have as many factors in your favour as possible. These situations come along only rarely -- the trader must wait, be patient, sooner or later the right situation will come along."
He invested with the prevailing trend, whether up or down, and generally made sure the main stock market, the sector, and the individual share price, were all travelling together before committing his funds. This leads to:
Jesse Insight -- However defined, wait for favourable price trends before investing.
Central to Jesse Livermore's strategy for timing was his use of what he called 'pivotal points' for entering and exiting investment positions.
You've probably noticed these points on share-price charts. It's where a share price pauses, then jiggles about after a big move either up or down, before moving strongly in either direction.
So it follows that a pivotal point can mark a trend continuation or a trend reversal. Back to Jesse:
"Whenever I have had the patience to wait for the market to arrive at what I call a 'Pivotal Point' before I started to trade, I have always made money in my operations."
The idea strikes me as being a useful concept for modern investing. We all know that share prices rarely go up or down in a straight line, so if we are investing in FTSE 100 favourites such as Aviva (LSE: AV), GlaxoSmithKline or Tesco (LSE: TSCO), it makes sense to back a conviction based on fundamental analysis with an advantageous entry or exit point.
Timing in action
In 2010, BP's share price began to fall when the company's blowout disaster occurred in the Gulf of Mexico. The share price fell heavily and just when it looked liked it could fall no more, fell some more...
My fundamentals-based view was that BP could survive and the share price might recover. The share-price movement eventually confirmed my analysis when, despite big general market falls, BP's share price suddenly refused to fall further: investors had finished selling.
It seemed like the perfect time to back my conviction, so I bought some of the shares at about 300p, which turned out to be a reversal pivotal point. The share price rallied and I sold the majority of my BP shares at prices around 500p.
Jesse Livermore once said: "It's not the thinking that makes the money, it's the sitting and waiting." If I'd acted on my thinking and fundamental analysis alone, I could have bought BP's shares too soon, as the price was still falling and thus diminishing my chance of making money.
Jesse Insight -- Time fundamentals-driven investments using pivotal points.
Looking for the long trend
So it's important to avoid over-trading, which could lead to the market shaking you from an investment on a minor reversal within a major upward trend. In tomorrow's article, I'll look at exactly how Jesse Livermore's timing strategy kept him in the major trends, and how he approached money management.
For now though, let me just tell you that I'm sold on how Jesse Livermore invested his way to million dollars (and well beyond!), and I'm using his lessons to battle with the market and help take my own portfolio to the magic seven-digit milestone. Wish me luck!
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