For most of the speculators, banks, and financial institutions who were around to experience it, 1929 was indeed a year of reckoning, marked by utter financial and personal ruin for most. It taught us that on the other side of market euphoria was a cliff that can take away far more than what had been gained on the way up; and for the very few or the very lucky, it confirmed that only through betting on the ominous downside of an overly-optimistic rainbow can you ever find its pot of gold.
Legendary trader, Jesse Livermore, was one of those few lucky traders. In fact, it was this trade that projected him into the heights of legendary status.
By September of 1929, the Dow Jones Industrial Average had gone up approximately five-fold from where it was six years prior. The public was not only fully invested in the stock market, but many were investing with borrowed money: brokers allowed people to put up less than a third of the purchased price.
Overall all, the investing public had taken on a debt burden of $8.5 billion to invest in a seemingly runaway market. However, there was a big problem with this figure, and most investors didn’t stop to think about it: $8.5 billion exceeded the amount of dollars in circulation.
Toward the end of September, stocks began losing momentum, showing signs that it might not have been able to continue its upward trajectory. And from that stall began a slight decline. Sitting on the sidelines, watching the markets very carefully, Jesse Livermore decided it was time to take action: he began shorting the market…heavily.
The following weeks saw what history has dubbed “The Great Stock Market Crash of 1929.” Never before–neither in its previous market crashes nor its bank runs–had the United States seen a crash of this magnitude. It was simply the most destructive market plunge Americans had experienced. The stock market had plunged 25%, on October 28, “Black Monday,” and October 20, “Black Tuesday.”
The plunge that began in 1929 with the Dow topping 381.17 didn’t complete its cycle until three years later, when the Dow hit 41.22. By 1932, the Dow had dropped by 89%. By adding to his short positions, Jesse Livermore ended up amassing a total profit of $100 million. This would be equivalent to approximately $1.47 billion in 2018.
This trade may have etched Jesse Livermore’s name in market history, but his legendary status as an unrivaled trader was subsequently rivaled by his shadow as a tragic figure. Toward the end of his life, he had made and lost fortunes several times, eventually losing his entire stake. Jesse Livermore committed suicide in 1940.
A figure of inspiration and warning, an example of astonishing greatness and utter ruin, a lesson on how to trade and how not to trade, Jesse Livermore, the legend, represents both polarities of the trader’s experience taken to the extreme.
There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.