Surviving The Investing Game: Lessons From The World’s Greatest Stock Market Speculator
Winning and losing—in life, investing or climbing mountains—are worth nothing outside the game. Surviving is everything.
This was seventy-eight years to this week. The Nov. 29, 1940 edition of the Cornell Daily Sun newspaper in the United States reported a suicide that happened the previous day. A Wall Street speculator, who had gone bankrupt, had killed himself.
The man left a suicide note addressed to his wife that read: “My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love, Laurie.”
This man had hinted about his death just a day before at a club party when a photographer asked if he minded if he took his photo. The man replied, “Not at all but it’s the last picture you’ll take because tomorrow I’m going away for a long, long time.”
It was indeed the last photograph taken of him.
At the time of his death at 63 years of age, the estate of Jesse Lauriston Livermore, the man the world knows as the greatest stock market speculator of all time, was valued at $10,000 in assets and $361,010 in liabilities, (as per his biography Jesse Livermore: World's Greatest Stock Trader). This was far from the $100 million profit he had made in the crash of 1929 by shorting stocks, becoming one of the richest in the industry.
By the way, at 3 percent compounded annually, that $100 million would have been $1.4 billion today. At 5 percent, $7.7 billion.
Ironically, in his book—How to Trade in Stocks—that was published the same year he committed suicide, Livermore had written: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”
He, after getting rich four times in his life, died poor.
No Shortcuts To The Top
One of the best books I read this year was No Shortcuts to the Top. This is an autobiography of Edmund Viesturs, wherein he documents his 16-year journey summitting all 14 of the world’s eight-thousander mountain peaks (more than 8,000 meters above sea level), and his strategies to manage risk in extreme environments.
In the opening scene of Ed’s memoir of his quest to become the first American to climb the 14 mountains in the world higher than 8,000 meters, he and a friend nearly get thrown off the face of K2 when they’re caught in an avalanche.
It’s one of the few moments in the story when his life genuinely seems at risk, as his intense focus on safety is generally successful.
Then, while describing the deaths of a couple of his friends, Scott Fischer and Rob Hall, who made the grave mistake of reaching the summit of Everest in the evening, Ed warned, “Getting to the top is optional. Getting down is mandatory.” He wrote:
“I wouldn’t have done that. I wouldn’t have gone to the summit at four P.M.
Long before…I’d developed a formula that was my cardinal rule in the big mountains. The formula: Getting to the top is optional. Getting down is mandatory. That rule…is my deepest article of faith.
Even while I’m going up an 8,000er, everything in my planning is calculated toward getting back down. You can’t arrive on a summit and then make a plan for getting down. By then it may be too late.
In a sense, I plan my climb backward. The time that I want to arrive back in my high camp dictates when I need to reach the summit, which in turn dictates the hour I need to leave high camp on the way up. I always know that if I’m not near a summit by two P.M., I need to turn around and go down.”
This lesson comes through most forcefully when Ed recounts how he once attempted to reach the summit at Everest but backed out just 300 feet from the top because it just didn’t feel right.
He noticed a change in the weather. Conditions were ripe for a potential avalanche. He realised that if the team pressed on to the top of the mountain, they wouldn’t have time to make it down. So, he and his team turned around and went back to the base. They lived to scale Everest another day.
What Can Kill You In Investing
One of the most famous sayings of Warren Buffett’s business partner Charlie Munger is: “All I want to know is where I’m going to die, so I’ll never go there.”
Ed Viesturs may have never heard of Munger, but he understood this thought well, avoided what could have killed him, and survived. Jesse Livermore possibly didn’t care about this warning (though Munger was just 16 years of age when Livermore killed himself), did what could have killed him, and died.
In his book Jesse Livermore - Boy Plunger: The Man Who Sold America Short in 1929, the author Tom Rubython says of the period during which Livermore lost his $100 million fortune: “In truth, it was a period of total inconsistency and illogicality during which, by his own rules, he should have been out of the market sitting on his money. But he wasn't. Having conquered the world, he wanted to climb the mountain again.”
Livermore seemingly betrayed his own trading principles and lost 40 percent of his profit in 18 months following the 1929 crash.
He went long on the stock market as it slipped to its lows by mid-1932. Then, in 1932, he shorted the market again, and this time the market doubled. The final blows were caused in 1933 when he went long the market just as it fell back near its 1932 lows.
Call it extreme bad luck, but Livermore had set himself up in a way for such luck to find him. Of course, you can make out from the readings on his life that he was prone to depression caused by extreme stress of his work i.e., stock trading and speculation. He once said of his profession:
“…a man must give his entire mind to his business if he wishes to succeed in stock speculation.”
He probably took his advice too seriously and gave his entire mind to his business. It was seemingly during one of these depressive moments that he took his own life.
There is, however, no doubt that upping the game, and getting rich in the process, had gone to Livermore’s head. As he reflected after his third bankruptcy (Source: Reminiscences of a Stock Operator):
“After all those long years of successes, tempered by mistakes that really served to pave the way for greater successes, I was now worse off than when I began in the bucket shops. I had learned a great deal about the game of stock speculation, but I had not learned quite so much about the play of human weaknesses.
There is no mind so machine-like that you can depend upon it to function with equal efficiency at all times. I now learned that I could not trust myself to remain equally unaffected by men and misfortunes at all times.
I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting the swelled head. A great many smashes by brilliant men can be traced directly to the swelled head -- an expensive disease everywhere to everybody, but particularly in Wall Street to a speculator.”
This last statement is worth re-reading and remembering:
The swelled head is an expensive disease everywhere to everybody, but particularly to a stock market speculator.
I would add the ‘investor’ to this too. A swelled head doesn’t care about Munger’s advice—“All I want to know is where I'm going to die, so I'll never go there”—or Ed Viesturs’—“Getting to the top is optional. Getting down is mandatory.”
Warren Buffett knows about the swelled head very well, given that his most important lesson for investors has been:
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
But the swelled head—during and just after a heady run in the market—does not bother about this rule too, for losing money doesn’t seem to be a part of the equation.
It’s Not Only About Winning And Losing
You see, for most of us in the stock market, the only way to measure success and failure is by measuring the size of our game and counting the money invested in our portfolios.
We often think in terms of just right and wrong. We think we are right when we are making money, and wrong when we are losing. This, I think, is a fatal mistake. It is because whether we are right or wrong, either of these results will evoke a strong emotional response.
Being right makes us euphoric, and that feeling can be highly addictive. This is what caused Livermore to take bigger risks with his own and borrowed money. Being wrong can make us miserable. This is what led Livermore to kill himself.
However, while playing the stock market game, what we often forget is that apart from being right or wrong there is another option we have, and we can take it whenever we want. That option is, not playing the game. Doing nothing. Maybe, at times, retreating like Ed did from just 300 feet of Everest summit because “it just didn’t feel right.”
You see, winning and losing—in life, investing, or scaling mountains—are worth nothing outside of the game. Surviving is, however, everything if you want to take a shot at it some other day.
The American entrepreneur and author Gary Keller said:
“ Even if you’re sure you can win, be careful that you can live with what you lose.”
And to repeat what Livermore wrote in his last book:
“ …it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”
Remember these thoughts, and you will survive, and thrive. In life, investing, and everywhere.
Vishal Khandelwal is the founder of SafalNiveshak.com, an initiative to help people learn the art of value investing and behavioural finance to be able to make better investment decisions.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.