Mar 06

Lessons from the past – Principles of momentum trading

Although he traded at the beginning of the last century, many of Jesse Livermore’s principles are just as true today.

A Brief history

Jesse Livermore was born in 1877 and died in 1940. He was an American Stock Trader who during his lifetime made, and lost, many multi-million dollar fortunes. Early in his life he was known as the ‘Boy Plunger’ as he started trading in bucket shops (gambling houses) at the age of fifteen. By the time he was forty years old he was reputed to be worth over 100 million dollars (6 billion dollars in today’s terms), and was famously known for selling short the 1929 American stock market crash.

Livermore was active in America at a time of great change in the U.S. economy. The Civil War was long over, but still well remembered. It was the time of the huge leap forward in Industrial development, which in turn created the ability for America to feed and clothe the world – and everyone knew it. This produced an astonishing influx of immigrants, escaping poverty from the countries of the Old World and determined to better themselves.

This is the environment where Jesse Livermore worked and invested. He mixed with the likes of Henry Osborne Havemeyer (the founder of American Sugar Refining Co), James Stillman (founder of The National City Bank which has become today’s Citigroup),  E.H.Harriman, J.P.Morgan and William Rockefeller (all involved in the developing oil business). It appears that he was familiar with all the major people who ran these developing industries – be it Coal, Cotton, Sugar, the Railways, the Banking World, the Government and even Coffee. So he had an amazing amount of knowledge at his fingertips. Yet he still learnt not to believe in anticipating the market, but waited until it moved in the way that his knowledge lead him to believe that it should. Then he invested in a Bull market and sold short in a Bear Market.

However, he was not so lucky in his three marriages, and also suffered from a life long history of clinical depression. In 1940 after one of his financial failures he committed suicide. This I suppose is evidence for some people that money does not always bring contentment.

Principles of momentum trading

So why should Jesse Livermore be of interest to the modern day DIY Investor? Well, we are fortunate that in 1923 in conjunction with Edwin Lefèvre he wrote the book ‘Reminiscences of a Stock Operator’. In this book he describes how he made money and, more importantly, how and why he lost his fortunes. He describes how to interpret the movements of the markets, and how to achieve the right mind set to be successful. He leaves us many inspirational sayings which demonstrate clearly his operational principles.

Although he was active over one hundred years ago, trading in stocks and commodities, the same principles are just as legitimate in today’s world of Unit Trusts, OEICs, Investment Trusts and Exchange Traded Funds.

Anybody trying to improve the performance of their ISAs and Pensions (SIPPs) could not do better than to read this book memorising and following his thoughts and directions. The following are a few of these thoughts to which I have added my own casual interpretations.

“Do not act on your own instincts until the market has confirmed that these instincts are correct.” Remember you are in the business of making investments not prophesies. Leave that game to gipsies, the Church, and Politicians. If you are following and not anticipating the market you are much more likely to enjoy the rises and avoid the falls.

“All through time people basically act and react in the same way. This is the result of greed, fear, ignorance and hope. That is why stock market patterns re-occur on a regular basis.”  So do not think you can buck the market. Remember there is nothing new under the sun, just variations of the same.

“Let the price dictate your actions and stay with profitable trades until there is a good price reason to exit.”  “In a bull market, trade the leading stocks in the growing sectors”. Both of these expressions mean that like Livermore you must have access to accurate and current information. Then have the strength to act on what your reading tells you, and not on what you speculate might be going to happen.

“Do not trade when there are no clear and obvious opportunities. There is nothing wrong with holding cash.” Today so many financial pundits can be heard saying that you must be in the market whatever the conditions. It’s a great pity that these people do not recognise cash as being a very important investment sector – especially in volatile times and Bear markets.

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, or the man of inferior emotional balance, nor for the get rich quick adventurer. They will all die poor.” In other words investing is a considered exercise requiring patience and the capacity to avoid greed and fear in equal measures.

The above history is well described in his book and, put alongside his sayings, this a very good foundation for any potential new investor even in this modern world where information is readily available on your computer screen. I wish that I had known about Jesse Livermore when starting out on managing my own investments. My earlier results would have been better, and my life less fraught.

Applying his principles in the 21st Century

At Saltydog Investor we generate up to date performance data on Unit Trusts, OEICs, Investment Trusts and ETFs in a format designed to help private investors spot trends as they emerge, and then track them until they inevitably start to fade.

We also invest our own money based on Jesse Livermore’s principles and publish details of our demonstration portfolios. The cautious ‘Tugboat’ has been going the longest and was launched near the end of 2010. Since then it has gone up by over 46%.

Graph showing how you can make money with Saltydog


To find out more about the service we provide, and the 2 month free trial that we offer to all new members, go to our website


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