By Michael Hooper
In chapter 5 of the Psychology of Money, the author Morgan Housel discusses how there are multiple ways to become a millionaire, but staying a millionaire requires a different sort of skill. Jesse Livermore and Abraham Germansky both were multi millionaires, who lost everything in the end.
There’s a book called Reminiscences of a Stock Operator by Edwin Lefevre, it’s about the story of Jesse Livermore. As a boy he was gifted with numbers and mathematics. He got a job as a quotation board boy, he posted the latest quotes on a big chalk board in the customer room. He wrote down the patterns of stocks in a notepad; he analyzed the numbers and determined where the numbers would go next. He used to go to these places, called the bucket shops, where you could buy stock on margin. In his first trade he made $3.12 on Burlington stock.
He was 15 years old and making money in the bucket shops, by figuring out the direction of stocks. He understood momentum and how it builds and falls. He could trade in and out of stocks quickly for a profit. He eventually got so good, the bucket shops banned him from trading. Then he went to bucket shops in other cities.
Eventually he graduated to the New York Stock Exchange, where he struggled initially, but eventually found a way to make money by trading stocks. His most profitable day was during the stock market crash of 1929 because he had shorted the market. He made $100 million in 1929. He was known as the boy plunger. Meanwhile Germansky went broke in the 1929 stock market crash.
One of the people that Livermore talks about is a businessman named Russell Sage. Livermore said the man was gifted at both money making, and money hoarding. Russell Sage died at the age of 89 in 1906 and left all his money to his wife, about $70 million and then she put the money into charitable causes, including, the Russell Sage Foundation
"Getting money requires being optimistic and putting yourself out there," according to Morgan Housel. "But keeping money requires the opposite of risk, it requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and acceptance, that at least some of what you’ve made is attributable to luck so past success can’t be relied upon to repeat indefinitely." Page 60.
Michael Moritz of Sequoia Capital, said “we can’t afford to rest on our laurels. We can’t be complacent we can’t assume that yesterday’s success translates into tomorrow’s good fortune.”
Jesse Livermore said, “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 inflated ego can drive a man to chaos, madness and ruin.
Jesse Livermore learned how to trade stocks by failing miserably several times. During one of his worst failures, he took a tip on buying cotton, but the trade went south, he ended up broke. After that, he decided never to act upon tips, and to do his own thing.
One time I got a tip on the golf course. I lost 50% on that trade.
Overtime Jesse Livermore scored big in 1906 when he shorted the market and the earthquake happened in San Francisco, causing the market to go down. He continued to make money and started living large. He married again at age 41 and settled down with a wife and two kids on Long Island. There he collected over 400 guns and had a shooting range. She had parties on the weekends. He enjoyed his yacht and had affairs with women.
Their lavish lifestyle attracted thieves who broke in and stole $100,000 worth of jewelry.
One of the lessons taught in the book The Millionaire Next-Door is modesty, the millionaire next door lives in a modest house and drives a used car. Indeed, wealth attracts bad people, thieves, con artists, manipulators, speculators. Today more than ever you are bombarded by con artists, and scammers, who send texts or emails, saying click here, look at these pictures, but it turns out to be a website taking over your computer. Flaunting wealth with posts about your new Porsche, your fancy yacht and your vast estate is probably not a good idea.
Jesse Livermore created lessons that he didn’t always follow. He married multiple times and had many girlfriends. Jesse Livermore went bankrupt four times and committed suicide at age 63. Yet he is considered a pioneer in day trading who articulated the psychology of trading.
Morgan Housel says you could be wrong half the time and still make a fortune. He tells the story of Heinz Berggruen, who fled Nazi Germany in 1936 and settled in America where he studied literature at Berkeley. He collected art and in 2000 sold a collection of Picassos, Braques, Klees, Matisses to the German government for €100 million, he probably had a bunch of bad art but it’s the one percent of his art that was so phenomenal that it made him very rich.
Morgan Housel says how you behaved as an investor in late 2008 and early 2009 will likely have more impact on your lifetime returns than in everything you did from 2000 to 2008.
There’s a lot of truth to this, some people bailed out on the stock market in 2008-09 fearing the worst ahead, but people who continued to invest every month did well. Warren Buffett was aggressively buying railroad stock in 2009-10 and came away with BNSF Railway, now worth 3.6 times what he paid for it.
“Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control,” Housel wrote. Page 77, the Psychology of Money.
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