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Jesse Livermore – Part 3

Having just made a pile of money from his previous shorting of Union Pacific, Jesse was ready for more action. The next move he was considering was reversing his position on Union Pacific. He was warned away from this movie by Ed Hutton, a friend and a trader he respected. Hutton was proven wrong as the stock rebounded. Not following his instincts had cost Livermore some $40,000, and Jesse blamed himself for this.

His next big move started in 1906.  This was a different kind of opportunity as it was the first time Livermore would face an entire market shifting dramatically. Jesse was seeing signs that the market would turn exceptionally bearish before it became obvious to people. He started short selling the market aggressively at this point.

What Livermore saw coming was the 1907 Bankers’ Panic, also called the Knickerbocker Crisis. In October of 1907 the New York Stock Exchange fell by nearly half of its value. This caused a run on the banks and a lot of panic in the economy. The event that made the market go from bad to catastrophic was an attempt by the Heinze brothers to corner the market in the stock of the United Copper Company. When this plan failed, the stock prices of United Copper plummeted. This caused a run on the banks Heinze owned. The bank’s clients no longer trusted that their account balances could be paid out, so everyone scrambled to be first to withdraw everything. This led to a domino effect of more runs on related banks and trust companies in New York.

All of this panic in the markets had made Livermore approximately a million dollars for his short selling. He had been so successful in his short selling that when JP Morgan led the charge to keep New York’s economy from collapsing, he personally asked Livermore to stop shorting. Livemore heeded this advice partially to help New York from going bankrupt. At this point he switched to buying up equity, also at the request of Morgan, to provide liquidity to the rocky market. Even this step was to Jesse’s benefit, as prices had nowhere to go but up at this point. In about a year Livermore had went from broke to a net worth of about $3 million.

By the year 1908 he had raised his worth further, to $5 million. On the advice of his friend Teddy Price, he had gotten into the cotton market. This was another time he ignored his instincts, as well as his rule about getting out of a losing position quickly. Everyone else sold, including Price, and Livermore was caught holding the bag. He had lost almost everything.

The next 4 years would be rough for Jesse. He was heavily in debt and had to declare bankruptcy in 1914. He lived out of a cheap hotel and scraped by.


Check out the next article for more of Livermore, and how he attempts to get back on the horse.

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