Jesse Livermore and Market Sentiment
An early example of how a bull market can ignore bad news is given by Edwin Lefevre in Reminiscences of a Stock Operator. Lefevre was told the story by Jesse Livermore, one of Wall Street's most successful traders. The story deals with the time Livermore sold Union Pacific short on nothing more than a hunch.
The hunch proved to be right - the San Francisco earthquake followed within a few days of Livermore starting to short Union Pacific. What's interesting - in terms of market sentiment - is how slow the bull market was to react to disastrous news. The psychology of the market at that time had grown so bullish that it took an unexpectedly long time even for a catastrophe to turn it bearish.
The story is set in 1906 but makes compelling reading for modern investors. As Jesse Livermore himself said, "there is nothing new in Wall Street. There can't be, because speculation is as old as the hills".
There I was, short five thousand shares of U P on a hunch. That was as much as I could sell in Harding's office with the margin I had...
"That was too much stock for me to be short of, on a vacation; so I gave up the vacation and returned to New York that very night. There I could move quickly if I had to.
"The next day we got the news of the San Francisco earthquake. It was an awful disaster. But the market opened down only a couple of points. The bull forces were at work, and the public wasn't responsive. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish.
"It is all in the state of sentiment at the time. In this case the Street did not appraise the extent of the catastrophe because it didn't wish to. Before the day was over prices came back.
"I was short five thousand shares. The blow had fallen, but my stock hadn't. My hunch was of the first water, but my bank account wasn't growing; not even on paper. The friend who had been in Atlantic City with me when I put out my short line in U P was glad and sad about it.
He told me: '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.'
"Give them time," I said. I meant prices. I wouldn't cover because I knew the damage was enormous and the Union Pacific would be one of the worst sufferers. But it was exasperating to see the blindness of the Street.
"Give 'em time and your skin will be where all the other bear hides are stretched out in the sun, drying," he assured me.
"What would you do?" I asked him. "Buy U P 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? The best you can say is that the trouble may not be as bad as it is painted. But is that a reason for buying the stocks of the roads chiefly affected? Answer me that."
But all my friend said was: "Yes, that listens fine. But I tell you, the market doesn't agree with you. The tape doesn't lie, does it?"
"It doesn't always tell the truth on the instant," I said.
"Listen. A man was talking to Jim Fisk a little before Black Friday, giving ten good reasons why gold ought to go down for keeps. He got so encouraged by his own words that he ended by telling Fisk that he was going to sell a few million. And Jim Fisk just looked at him and said, 'Go ahead! Do! Sell it short and invite me to your funeral'."
"Yes," I said; "and if that chap had sold it short, look at the killing he would have made! Sell some U P yourself."
"Not I! I'm the kind that thrives best on not rowing against wind and tide."
On the following day, when fuller reports came in, the market began to slide off, but even then not as violently as it should. Knowing that nothing under the sun could stave off a substantial break I doubled up and sold five thousand shares. Oh, by that time it was plain to most people, and my brokers were willing enough. It wasn't reckless of them or of me, not the way I sized up the market. On the day following, the market began to go for fair. There was the dickens to pay. Of course I pushed my luck for all it was worth. I doubled up again and sold ten thousand shares more. It was the only play possible.
I wasn't thinking of anything except that I was right - 100 percent right - and that this was a heaven-sent opportunity. It was up to me to take advantage of it. I sold more. Didn't I think that with such a big line of shorts out, it wouldn't take much of a rally to wipe out my paper profits and possibly my principal? I don't know whether I thought of that or not, but if I did it didn't carry much weight with me. I wasn't plunging recklessly. I was really playing conservatively. I could read the tape very plainly. There was nothing that anybody could 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?
I was not betting blindly. I wasn't a crazy bear. I wasn't drunk with success or thinking that because Frisco was pretty well wiped off the map the entire country was headed for the scrap heap. No, indeed! I didn't look for a panic. Well, the next day I cleaned up. I made two hundred and fifty thousand dollars. It was my biggest winnings up to that time. It was all made in a few days. The Street paid no attention to the earthquake the first day or two. They'll tell you that it was because the first dispatches were not so alarm ring, but I think it was because it took so long to change the point of view of the public toward the securities markets. Even the professional traders for the most part were slow and shortsighted.