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Market Overview

The 1929 Crash and the $100 Million Profit


This weekend marks the 82nd anniversary of the greatest stock market crash in American history. Given the recent market struggles (which seem miniscule in comparison), it is fitting to highlight an individual who wound up making $100 million dollars in that epic collapse.

It is autumn1929 and the Dow is up five-fold in the last six years. Euphoria is gripping the market and everyone is getting involved. Brokers are promoting loans to buy stocks and the public cannot get enough - putting up less than one third of the purchase price is a great deal for seemingly guaranteed gains. The total outstanding amount of loans begins to balloon, reaching $8.5 billion outstanding, which, fascinatingly enough, is more than the total amount of money in circulation.

Stocks level off and start to decline in September 1929, and Jesse Livermore, one of the most renowned traders in history, sees his opportunity. He begins to heavily short the market, despite the cautioning of his counterparts. It does not take long for his bet to pay off.

In the following weeks, the stock market experienced what has become known as the “Great Stock Market Crash of 1929” – the most destructive stock market collapse in the history of the United States. The decline included a two-day, 25% drop on what is now referred to as “Black Monday (October 28th)” and “Black Tuesday (October 29th).”

The Dow plunged 47% from the market high of 381.17 on September 3rd, 1929, to its interim bottom of 198.60. The official low was not seen until 1932, when the market hit 41.22 – an 89% drop in 3 years.

Livermore, as a result, benefitted greatly. His profit from the initial drop and the decline that followed is one of the largest wins by a stock trader in history - $100 million dollars.

Jesse Livermore

Born in 1877, Jesse got his first job at the age of 14 writing stock quotes on a chalkboard in a broker's office. He would watch the prices change and try to find patterns. By the age of 15 he had already made his first $1,000 from trading, a sizable sum at the time – not to mention for someone his age.

His career progressed and he continued to trade his own money in the small brokerage houses (referred to as bucket shops at the time), despite their objections. He quickly became known as “the boy plunger” for his ability to suck money out of the market.

In the 1907 crash, Jesse was 30 years old and solidified his reputation as a real market participant. It was during that collapse, that he made his first million.

1929, however, provided him with his crowning achievement. The short positions he took just before the “Great Crash,” earned him a profit of $100 million dollars, which, in today's figures equates to $1.327 billion dollars!

Throughout his trading career, Livermore made and lost huge amounts of money, and actually wound up going bankrupt on numerous occasions.

Despite his many successes, Livermore battled constant depression, and in 1940 wound up taking his own life.

The classic novel, Reminiscences of a Stock Operator, was written by Edwin Lefèvre and is based on the author's interviews with Mr. Livermore. It remains one of the bestselling stock market related books of all time.

In 1939 Jesse penned his own book, How to Trade in Stocks, which outlines his methods, insights and personal journey.

Jesse's $100 Million Key

Livermore's methods were relatively simple and logical but required two of the most important characteristics of a successful trader - discipline and patience. While he had many trading rules, there was one primary form of analysis that he used.

Livermore used what he referred to as “pivotal price levels” to determine entry points and stop levels. He would watch the strongest stocks in the strongest sectors, and as they rose, he would buy as the stocks made new highs. He would then let his profits ride, and would add to positions which continued to move in his favor.

Eventually these stocks would stop going higher, and would begin to decline. If shares could not make new highs again on the retest, Livermore took it as a warning sign that the broader market would turn down. He figured that if the strongest stocks could not go up anymore, it was exceedingly unlikely the broader market could continue higher for much longer.

It was this method of analysis that allowed Jesse to see the market turning and profit to the tune of $100 million from the ensuing decline in 1929.

The following are summaries of some of his other rules, which he used to find entries, exits, and control his trades:

• Buy strong stocks in a bull market. Short weak stocks in bear market. Only trade with the overall trend of the stock market.

• Trade only at the pivotal points in a stock, and if there are no clear signals do not trade.

• Good trades usually show a profit quickly. Let these profits run and close losing trades promptly. If trading at pivotal points being “right” or “wrong” should be evident within a few trading sessions.

• Trade with a stop and adhere to it.

• Add to positions which show a profit, never add to positions which show a loss.

• Focus on a few stocks which are moving well. Don't try to trade or track too many stocks.

• Always trade with a well formulated plan.

• Do not deviate from the plan.

Despite continually making and losing massive amounts of money in the stock market, Jesse Livermore is considered one of the greatest traders off all time. His ability to capitalize on trends, both up and down, is rarely matched to this day.

He admitted that on the occasions which he lost money, it was because he deviated from his tested methods.

Frequent bouts with depression and other personal issues likely kept him from achieving his full potential, however, the lessons he left behind provide valuable insight into the movement of markets that still apply today.

The underlying elements of speculation do not change, and is epitomized perfectly in his quote: "There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again."


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