Let's return to our story....
Livermore had "always made money following his(hunches)." page 74 He sold 1,000 shares of Union Pacific on the spot. His friend thought Livermore must have inside information. Livermore didn't. Then, he sold another 1,000 shares of Union Pacific. His friend thought Livermore was stark raving mad. Livermore had no quantifiable reason, just years of experience and observation. Livermore sold another 1,000 shares of Union Pacific. Livermore's friend grabbed Livermore and said it was time to go before Livermore had sold all the shares of the company.
To the naked eye, nothing seemed wrong. The market was strong. Nobody was thinking of falling prices.
The next day, the market went up some more. At the end of the day, there was a sell off in Union Pacific. The price dropped below Livermore's selling price. Livermore was encouraged by the late day selling. (Late day selling is always a hint that lower prices may be ahead.) Livermore sold 2,000 more shares of Union Pacific.
Livermore cancelled his vacation and returned to New York that very night. He knew from the price action that something was up. He wanted to be prepared.
The next day, New York received word of the San Francisco earthquake. Could it be that people in the know were selling shares of Union Pacific late in the day the previous day? Livermore had no inside knowledge. He had seen alot of little things and his unconscious mind, his intuition, did the rest. His intuition told him to sell. Only later would he receive word of the earthquake.
Now, you might assume that the market dropped like a rock upon the news.
Not really.
In fact, the market opened down only a couple of points. Livermore explained that "the public never is independently responsive to news. You see that all the time." page 77. If the market is filled with bullish sentiment, then people do not want to accept bad news. As a result, prices came back.
Livermore's friend teased him. "That was some hunch, kid. But, say, when the talent and the money are all on the bull side, what's the use of bucking against them? They are bound to win out." page 77
Livermore accepted that prices hadn't dropped but they would. He challenged his friend with the fundamental argument "What would you do?...Buy (Union Pacific) on the strength of the millions of dollars of damage suffered by the Southern Pacific and other lines? Where are the earnings for dividends going to come from after they pay for all they've lost?" page 77
When the fuller reports came in the next day, the market began to slide off. Livermore doubled down and sold 5,000 more shares of Union Pacific. Nothing under the sun could prevent a substantial break. The next day, the market really just dropped. Livermore doubled down again.
For Livermore, the market was presenting a heaven-sent opportunity:
"I wasn't thinking of anything except that I was right--100 per cent right--and that this was a heaven-sent opportunity. It was up to me to take advantage of it. I sold more....There was nothing that anybody would do to undo the earthquake, was there? They couldn't restore the crumpled buildings overnight, free, gratis, for nothing, could they? All the money in the world couldn't help much in the next few hours, could it?" page 78
Livermore cleaned up the next day. He made $250,000.
That summer, Livermore took a real vacation in Saratoga. He had earned it. Of course, being Livermore, he kept one eye on the market.
He took the time to sit back and think about economic conditions. Stepping back and taking in the big picture is always invaluable as an investor and trader. If you are on the right side of the fundamental conditions, then you will profit in the long run. To quote Livermore:
"I studied the situation in 1906 and I thought that the money outlook was particularly serious. Much actual wealth the world over had been destroyed. Everybody must sooner or later feel the pinch, and therefore nobody would be in a position to help anybody. It would not be the kind of hard times that comes from swapping a house worth ten thousand dollars for a carload of race horses worth eight thousand dollars. It was the complete destruction of the house by fire and of most of the horses by a railroad wreck. It was good hard cash that went up in cannon smoke in the Boer War, and the millions spent for feeding nonproducing soldiers in South Africa meant no help from British investors as in the past. Also, the earthquake and the fire in San Francisco and other disasters touched everybody--manufacturers, farmers, merchants, labourers and millionaires. The railroads must suffer greatly. I figured that nothing could stave off one peach of a smash. Such being the case there was but one thing to do--sell stocks!" pages 93-94
But the market kept rallying! Livermore was right in a broad sense but his timing was off. His difficulties in getting his timing right reminds me of Bears before February 18 and May 1 of this year. The Bears were right in a macro sense about troubles ahead but the timing was early. Livermore concluded that it was best to start selling when the risk of the engine backfiring had been minimized.
When did Livermore know the time was right to start selling?
One day, he read in the newspaper that Great Northern was issuing new stock. Payments could be made on the installment plan. Installment plan? This new development meant that the big banks were not sure stockholders had the cash to pay for a bargain. No cash? Time to sell! A few days later, Livermore read another advertisement that said St. Paul had set its date of payment ahead of Great Northern. St. Paul was trying to beat the two other railroads to what little money was floating around Wall Street. This was another signal that money was scarce on the Street.
In Livermore's words, "If money already was that scarce--and you bet the bankers knew--what would it be later? The railroads needed it desperately. It wasn't there. What was the answer? Sell 'em!" page 98
(To me, the parallels today are with these global insurance companies. They did not plan on an earthquake/tsunami/nuclear meltdown. The bills have come due from Japan. And I figure the big banks know the real score better than me. But I digress....)
Livermore started selling stocks like a mad man. The rallies grew feebler and feebler. Prices kept breaking every day (Kinda like the month of June 2011)
By February 1907, Livermore had cleaned up again. He had big profits. He went to Florida to fish and rest.
While on vacation, Livermore forgot about stocks. He just wanted to fish and enjoy life. A friend brought him a newspaper one day. Livermore saw that the market had had a big rally. Hmmn. The Bear Market was not over and yet Wall Street was "marking up prices beyond reason or letting somebody else do it." page 103 Livermore couldn't stomach the fake rally. Livermore went to a broker's office and, after a false start, began selling stocks again. It was around Washington's birthday, 1907. The more he sold, the more his profits grew. Everything was going down. Livermore cut short his vacation and returned to New York.
For four months, he sold and sold stocks. The market rallied. He sold the rallies. The summer came again and the market grew dull. (As you recall, markets blow hot and cold.) He left on vacation for Europe.
While on vacation, he didn't give a thought to the market.
One day, he read in the Paris newspaper that Smelters had declared an extra dividend. Stock prices had been run back up and the market was strong again. Well, Livermore knew that the Bear Market wasn't over. "The news simply meant that the bull cliques were still fighting desperately against conditions--against common sense and against common honesty, for they knew what was coming and were resorting to such schemes to put up the market in order to unload stocks before the storm struck them." page 109
Livermore sold Smelters, cancelled his vacation, and returned to New York.
Once in New York, Livermore sold more stocks. As money got tighter, the call-money rates went higher and prices of stocks lower. The money market was megaphoning warnings to the world. People believed in miracles, so they did not sell their speculative stocks. Big mistake!
(In this business of investing and trading, hope is your enemy. You must sell when you get the feeling that something is wrong. The first loss is always the best loss. He who panics first panics best!)
One day in October 1907, there was just no more money. There was no money anywhere. You couldn't liquidate stocks because there was nobody to buy them. The intervention of J.P. Morgan saved the market. Livermore covered his shorts, profiting $1 million on October 24, 1907. On that day, there were no bids for Union Pacific at any price! No one had money to hold stocks! No one had money to buy stocks!
Conclusion.
Does history repeat itself? Yes and no. Patterns recur but never in identical fashion. Otherwise, everyone would be wealthy and retired. The best we can do is read the tea leaves, connect the dots before the next guy, and be alert to the economic impact of distant earthquakes.
Have a great summer!
Wink
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