Debunking Livermore...

Debunking Livermore...

You have to know the facts before you race around calling someone the best trader ever. I think that there are far better examples of consistency than Jesse Livermore. For his time no doubt he was the best and brightest trader. Unless you read the book you don't really see the ups and downs that he experienced in his life getting to the point where he was extremely wealthy. However at the end he made the classic mistake of what most traders do when they get it right. They give it all back and then some. That is what happened to most of the people in the Dot.com bust. There were day traders making about 20 million a year during the peak of the boom. However when the markets turned south they gave it all back.
     Livermore did exactly that too over time. Yes he capitalized on the collapse of 1929 and he made a fortune. However he eventually gave it all back and committed suicide because of his depressive disorder which explains a lot about his trading strategies. When you have this sort of illness (and it may have been bi polar) you will have manic swings of moods from elation to severe depression. The reason why Robbin Williams may have committed suicide was not only because he was bi polar but because he had also lost a ton of money on poor investments. You see when you get it right when you have this disorder you are incredibly happy. A crazy type of happy. However when things go wrong (and they will from time to time in life) you also experience the extreme this way too. Livermore like a lot of traders that owe their good fortune to luck bet the farm on most plays. He knew how to take advantage of the bucket shops but when he entered the larger arena of the big players he had as much of lack of success or perhaps more than he had success.
      We tend to define him on his big trade. Sort of like Kyle Bass, John Paulson and Eric Sprott. You know you get it right once and you look like a hero. However you get it wrong and no one seems to remember in this business. Paulson, Bass and Sprott still have their billions as they did not turn around and go for it again once they made their money. They kept some back. Livermore on the other hand did not. He kept going for it until he had nothing left.
       I would rather look at a fellow like Stanley Druckenmiller or George Soros than most of these guys. The reason is they tend to lose more than they win but they know how to lose. They know how to walk away from a trade that is NOT going your way. Soros too is defined by one trade but that is not really fair. He may have made a billion in one day betting against the pound but did you know that he recently lost a billion betting against Brexit. Bet you didn't know that did you.
       What I am trying to tell you is although these guys get it right they do get it wrong. Often many times. What keeps them in the game is knowing when to trade and what to trade. As Soros himself said, "it is not so much how often you win or lose but rather how much you make when you win versus how much you lose when you are wrong". What he is saying is a strategy that is wrong the majority of time doesn't matter when you get it right you make it all back and then some which is what keeps your account growing.
The famous Turtle traders had a similar set of rules to follow. If you listen to the people that traded the system you will often here them say that at times you had to watch a 100% winner come back and get stopped for a small loss for the simple reason that you were looking for the big move. Dennis himself mentioned at a point that he could put the rules in the Wall street journal and no one would follow them.
       Druckenmiller was quoted as saying, "when you get it right, that is when you get greedy". What he is saying is that when you are right and the market is moving your way that is when you go for it and ratchet up the leverage or add to your position size. The simple reason is the fact that you are adding to a winner which is the opposite to what most traders do.
       The problem with Livermore is he did not deal with tremendous adversity very well versus these other fellows. He blew out quite a few accounts.
     In  my own world I would rather be conservative than praying for a home run. I would much rather make steady, consistent, returns that are compoundable versus hitting home runs. Think about this next time someone comes preaching about the great Jesse Livermore. He at the end lost it all and committed suicide.