As I’ve mentioned in recent posts, I’ve been reading Tom Rubython’s biography of Jesse Livermore. In doing so, I found the swings in Livermore’s net worth so crazy I decided to create a timeline wherein I inflation adjusted the numbers so they reflect 2021 dollars. The results of this effort are truly mind boggling.
The data:
Some notes:
Jesse Livermore (J.L. as he preferred) only managed his own money. He would borrow from brokers, friends, family, etc. but he never wanted to manage other people’s money.
He was a big client for his brokers thus they consistently loaned him money to trade. They clearly saw tangible benefits in allowing him to size up his positions with their borrowed money.
J.L.’s leverage generally ranged from 10:1 to 20:1 and sometimes got as high as 30:1. As to what this means for the uninitiated, if you’re leveraged 20:1, a 5% move will completely wipe you out.
J.L. was a speculator but he also acted as something of an investment banker at points in his career.
The creation of the SEC made a lot of what Livermore had done throughout his career illegal. The post 1929 world also significantly curtailed how much leverage a broker could provide for a client.
If you want the whole story, pick up the book.
I imagine if J.L. was alive today, he would be working at a “first loss” trading firm when he was down and would be pressing pedigreed prime brokers for capital when he was up (probably not unlike Bill Hwang of Archegos). “First loss” firms are typically broker dealers who will provide leverage against your money down. So, if you put down $10,000 a first loss firm might “match” you with $90,000. The net effect is you can now get 10x the market exposure you could without the first loss capital. The rub is that, if you lose 10%, the first loss firm sells your position before you lose any of their money (hence the name).
Very interesting, George. Not sure I would like taking that ride!
Vol-targeting wasn’t a thing back then :-)