Black Wednesday – How George Soros Tried to Crash the Pound
Trading guides, webinars and stories
Trading guides, webinars and stories
Jesse Livermore was born in 1877 in Shrewsbury, Massachusetts. He gained fame for his historic trading during the stock crashes of the early 1900s. Follow our posts on the crazy life of this famous trader on the Earn2Trade blog. Livermore’s unique style of trading earned him two nicknames.
The first is The Great Bear of Wall Street. The second is the Boy Plunger. They actually have similar meanings. Livermore’s talent for profiting in declining markets is why he was called The Great Bear. The Boy Plunger moniker came about because of his young entry into trading, combined with his love of “plunging” profits out of bucket shops and markets.
Livermore was born to a family of farmers. His father wanted him to become a farmer as well, but Jesse wanted no such thing. Instead, he left at the age of fourteen and went to Boston to work, equipped only with his mother’s approval and $5 she gave him. He worked as what was known as a “board boy.” This was a job displaying up-to-date stock quotes on a large chalkboard, so customers could view them. Paine Webber, the bank that employed him, paid a modest sounding $5 per week.
It gave him more than money, though. He would quickly grow familiar with the trends he saw in stocks. Young Jesse recorded the details constantly in his journal and then would guess at how the stocks would move next. This refined his understanding and kept his skills sharp.
It was not long before Jesse had a friend convince him to put some money down on his insights. He went to a “bucket shop” – a place where you could bet on the stock market without actually purchasing stocks. He wagered a week’s pay — $5. This first bet was correct, and he profited $3.12 from it.
Making 3 days’ wages so easily was a compelling reason to continue. This is just what Jesse did. Only 15 years old, he had already earned $1000, which is over $25,000 in today’s dollars. He was earning more from his bets than his job at the bank. At 16, he left the bank entirely to focus on his market wagers.
He did so well at the bucket shops that he was banned from them. He would then use disguises such as a beard to continue betting, but that eventually failed. Unphased, Jesse decided to make his fortune and move to New York in 1899. At this point, he had amassed $10,000. That is quite a large sum for anyone, and certainly enough to begin trading at a higher level.
Everything had been going well for Jesse. Clearly, he was a prodigy and ahead of his time.
You may also like:
Jesse Livermore was ready to challenge himself in New York. This is the time in his life when his wild side started to show. He had the heart of a gambler and the mind of a statistician. The former gave him a great deal of passion and occasionally caused big trouble.
In the first year in New York, he met a woman and quickly got into a serious relationship. Her name was Nettie Jordan, and they married within weeks of their meeting.
When his trading had some terrible reverses soon after this, he lost everything he had. This was the first bump in the road for Livermore, and it was a big one. He asked his new wife to pawn the large amount of jewelry he had bought for her. Nettie refused, which put them at odds. After only a few months together, they separated (though they did not divorce until later).
From here, Jesse traveled to St. Louis and went back to his bread and butter: betting at the bucket shops. They soon identified him and would not take his bets. He had a person place his bets for him, and soon he had another small fortune of $5000.
This money let him return to New York to try again. At age 24, he would turn this stake into $50,000 during the bull market of 1901. Again Livermore lost it all trading cotton.
At this point, he was trying to trade conservatively because he didn’t want to lose his stake again. As an example, he claimed to only profit $2000 when he could have made $20,000. By 28, he had $100,000 to his name. Despite his success, he still didn’t feel comfortable in his strategy because of the ups and downs.
Oddly enough, a trip to Palm Beach really helped him at this point. He had a hunch, unlike any other in his life, and he followed it. It was a strong feeling that it would be good to short Union Pacific stock. This was an odd idea to have because their stock was rising strongly. After this, Union Pacific got hit by a significant earthquake in San Francisco. This caused the stock to drop substantially, and Livermore made $250,000.
He could have made even more than this but was sticking to his cautious ways to bank his gains. Despite the caution, this was a truly huge sum for the time and set him up for the next stage of his life.
Jesse Livermore was ready for more action. He was still confident from the pile of money he from previously shorting Union Pacific. 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 saw 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 United Copper Company’s stock. 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. Livermore 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. Livermore had gone from broke to a net worth of about $3 million in about a year.
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.
Even though Jesse Livermore was broke again, he saw an opportunity. World War 1 was underway, and this created a bull market that he could profit from. Although this made him excited and anxious to get involved, he restrained himself from taking credit until he knew he was ready.
Jesse chose to spend six weeks watching the stock feed, analyzing it carefully. He wanted to find the perfect trade to stake his next move on.
Eventually, he settled on the stock of Bethlehem Steel since steel is a well-known wartime commodity. The price was also moving in the right way. It was at $98, and Jesse figured that it would jump upwards substantially if it passed $100. He bought 500 shares at this point and another 500 soon after at $114. This a rule of his, to increase the size of a position when the market shows you that you are correct. The next day the stock went to $145, and he closed out his position. He had made over $50,000, and he was back in the game.
This success gave him back much of his confidence. He continued trading this bull market and profited with consistency. Soon his equity was back to $500,000. He suffered losses from here as it appeared America would join WW1. Nevertheless, he ended 1915 with $150,000. Far from a high watermark for Jesse Livermore, but certainly a boon. In addition to the money he earned, he had learned many important lessons about managing his emotions and sticking to his trading rules.
Jesse was back in full swing. Tracking the market as he had practiced for years, he saw in late 1916 that there were signs of the market turning bearish again. His insights came from tracking the prices of many market-leading companies. Believing in his analysis, he sold 60,000 shares short and watched the market’s further movement. It dropped again, and he doubled his position.
Then an unusual thing happened on December 20, 1916. While on vacation in Palm Beach, Jesse watched the stock tape at Finlay, Barrel, and Co. He was shown a telegram from the manager that said President Wilson would attempt to end WW1. This news spread like wildfire, and later that day, it was widely known. When this rumor gained credibility, it crippled prices. This was good news for Livermore’s short position.
This was not well received by the American government, as one might expect. They formed a committee and investigated the leak. This led to Jesse being dragged in to testify on February 1st. He explained how he had been shot 7 weeks before the leak. The New York Times quoted him as saying, “How could I have known that far back that President Wilson was going to make a peace offering to Germany to end the war? I doubt if the president himself knew seven weeks ago that he was going to offer a proposal of peace”.
Livermore faced no more issues over this, though it did lead to the NYSE creating rules about trading on inside information. Certainly, if this even happened in modern times, it would create an enormous uproar. It is now cemented in law as a criminal to trade on the knowledge that is not public.
At this point, WW1 had ended, and Jesse Livermore was back on top. Yet again, he had recovered from falling apart, including paying off his previous debts. He bought $800,000 in annuities to have a reliable income even if he lost everything again. For similar reasons, he also put money into trusts for his family.
At this point, Jesse was becoming a household name. People were keen to follow his recommendations in the paper about how to play the market. His word was gold.
He was approached in 1922 by a newspaper writer named Edwin Lèfevre. Jesse Livermore gave interviews about his life, and they were published in a series, which quickly became popular with readers. The clever part of it was that they didn’t use Livermore’s real name. Instead, the articles were about a character named Laurie Livingston. In 1923, this series of articles would then be turned into a biography about Livermore named Reminiscences of a Stock Operator. This only increased his notoriety.
Jesse’s next move would come in the market for wheat in 1925. He was buying up wheat in 5 million bushel lots. The market was rising, and as usual, Jesse was adding to his position as the market reacted the way he wanted.
This led to an unofficial battle with an expert commodity speculator named Arthur Cutten. Cutten — like Livermore — was also bullish on wheat. However, Livermore turned from bullish to bearish on wheat when he thought the market had topped out. As he was selling his wheat, another trader named Thomas Howell also did so. He and Livermore dumped a landslide of wheat into the market while Cutten was traveling and unable to respond properly.
This angered Cutten and cost him a lot of money. He accused the other two of market manipulation. This is a serious charge because there are rules specifically set to protect the stability of grain prices. The investigation that followed said Jesse and Thomas acted only on regular business acumen, and they faced no further scrutiny. This wheat trading gave Livermore profits of $10 million, making money on both the bull and bear sides.
The next opportunity was one of the most epic in trading history. The market grew five-fold over the previous 6 years, with everyone getting involved. In September 1929, the stocks started to level off, and Jesse took note. He used a rule of thumb that had served him well. He would watch the strongest stocks in the strongest sectors and specifically look for when they stopped rising. His summation is that if the top dogs can’t rise further, the rest of the market will turn soon as well.
In October, he has lived out of his office for a time, trading heavily. This was common during the crash, though Jesse was doing it for profit rather than to bail out a sinking ship. While everyone else was losing a huge chunk of their investments, he was going strong on short sales. It was then, on October 24th to 29th, that the market would crash. Known as the Great Crash, the market lost a great deal of its value. The worst of this is the loss of a quarter of the Dow Jones value in 2 days. Traders were losing everything.
When Livermore had returned home to his family, they were panicking. They thought their fortune was lost. They might have known Jesse, but they clearly did not know his trading. As everyone else was losing, Jesse’s shorting had made him a staggering profit of $100 million. Not only were they safe, but they were also richer than ever, with Jesse making history. This amount, in modern terms, would be $1.3 billion.
Jesse Livermore would, yet again, lose this gigantic fortune by 1934. No one truly knows how he had lost it at this point since he was trading more and more secretively. This final bankruptcy took the biggest toll on him of all. The writing was on the wall for this in 1933 when he disappeared for a night and was subsequently diagnosed as having had an “Amnesia nervous breakdown.”
To help with his sense of purpose and depression, he eventually writes “How to Trade in Stocks” in 1939, publishing it a year after. It was the last thing he ever did that related to trading. The book had a mixed reception upon release. However, it eventually became a classic through the revisionist lens of history.
Jesse Livermore’s story is a fantastical journey of dizzying highs and devastating lows. His life offers a million lessons on how to succeed and a handful of enormous cautions on what to avoid and what happens if you fail to do so. Traders will not forget his legend anytime soon