Jesse Livermore and the magnet of dancing stock prices – a wealth of common sense

The New York Times wrote a story in 1929 that, in retrospect, is fascinating to read:

Some highlights when the Roaring 20s went into overdrive:

Despite setbacks, the brokers’ wires are once again clogged with orders for stocks from all parts of the country, tips are flying freely, violent advances and declines in leading issues are the order of the day.

It’s completely true that the people who know the least about the stock market have made the most money from it in recent months.

Jesse L. Livermore, one of the smartest stock market operators of this generation, once stated that “Stocks can be beaten, but no one can beat the stock market.” By this he meant that profits could be made on certain issues at special times, but that sticking to the general market would financially defeat even the smartest market players in the long run. However, it cannot be ruled out that someone is trying to beat the stock, and members of the Stock Exchange will testify that thousands of amateurs are doing just that – and on a massive scale.

There are many things in here that are eerily similar to today’s environment.

It was the tail end of a glorious bull market.

Private investors beat the pros.

Investors were all present in the stock market.

It felt like nothing could stop the runaway bull market train.

Take a look at this chart from the Financial Times on how the most shorted stocks have performed this decade:

There are two different ways you can interpret this trend:

1. Speculation has gotten out of hand. Retail investors have gone all-in on speculative junk stocks.

2. Professional investors are getting worse at shorting stocks. I thought the hedge funds would have learned their lesson from the short squeeze in Gamestop and other meme stocks a few years ago.

It could be a little bit of both.

In his new book 1929Andrew Ross Sorkin tells how Jesse Livermore used the excessive retail euphoria as a sign that the great bull market was coming to an end.

Livermore shorted the market and scored an estimated profit of $100 million.¹

The other famous contrarian indicator from The Great Crash was a shoeshine boy who gave stock tips to Joseph Kennedy in 1929. He also profited by betting against the market before the peak.

The tricky thing about using contrarian indicators in the information age is that you can find them everywhere you look.

There are so many more platforms for people to share opinions and analysis that there will always be fodder for whatever market position you want.

For example, I saw this story last weekend on The Today Show:

Almost everyone thinks we are in an AI bubble right now. Everyone also thought there was a 100% chance that we would be heading for a recession in 2022.

That didn’t happen.

What if a bubble is yet another consensus opinion that turns out to be wrong?

This is what makes it so difficult to hinder the stock market. There are usually plausible arguments on both the bull and bear sides of the equation.

Livermore once said, “Another lesson I learned early on is that there is nothing new in Wall Street. There can’t be, because speculation is as old as the hills. What is happening in the stock market today has happened before and will happen again.”

That is the human nature component that never changes.

People get excited, depressed, too high, too low and all the other feelings.

The difference between now and previous market environments is that there are millions and millions of people sharing these feelings with the world every day.

You can try to pick tops and bottoms if you want.

Good luck trying, because it’s getting harder every day.

Michael and I talked Jesse Livermore, retail investors, sentiment, the AI ​​boom and much more in this week’s Animal Spirits video:



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Further reading:
Timeless advice from Jesse Livermore

Here’s what I’ve been reading lately:

Books:

Also check out my conversation with Nick Downer from Opto Investments on how AI is helping financial advisors with private investments:



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¹Livermore repeatedly used sentiment indicators as signals to bet against the market – for better or for worse. But it should be noted that while Livermore made a fortune during the Panic of 1907 and the Great Depression, he went bankrupt several times because he couldn’t always outsmart the market, declared bankruptcy and eventually took his own life after a series of financial problems.