8Part II — The Investor's Workshop: Method, Valuation and Risk
Chapter 8
Speculation and risk management: Livermore's lesson
Jesse Livermore made and lost several fortunes. What he tells us about cutting losses, letting profits run and the mathematics of drawdowns.
Jesse Livermore was one of the most famous speculators in history. He made a fortune in the crash of 1929. He went bankrupt several times. His life is a textbook on both what to do and what to avoid.
What Livermore did well
- He cut losses quickly — he believed the first loss was the cheapest.
- He let profits run instead of taking them at the first rise.
- He ignored ‘sure tips’ — he analysed market behaviour himself.
Where he went wrong
When he broke his own rules. He increased positions beyond reason, believed he could do no wrong after a run of successes, and failed to separate the money he needed to live on from his speculative capital. His story shows that knowing the rules protects no one — only following them does.
Worked example
The mathematics of drawdowns
- Loss −10%
- you need +11.1%
- Loss −25%
- you need +33.3%
- Loss −50%
- you need +100%
- Loss −75%
- you need +300%
The deeper the hole, the harder it is to climb out. That is why a speculator's first job is not to make money, but to survive.
Bennyyoung operator
A mate from the gym says this stock is going to take off tomorrow.
Marioshift mate
Livermore lost a fortune on conversations like that. And he was a hundred times smarter than your mate from the gym.
10 / 14 · Educational content, not investment advice.