An Investment is a Trade Gone Bad

Posted: Mar 20, 2012 12:01 AM

Jesse Livermore, perhaps the greatest stock trader of all-time, once said an investment is simply a trade that had gone bad. 

One of Livermore’s greatest attributes was his ability to read markets and anticipate a change of direction. 

When the enthusiasm of 1929 was building to a fever pitch, Livermore was building substantial short positions in America’s finest blue-chip companies. 

Since his reputation brought constant scrutiny of his every move, he tried to keep a low profile by shorting stock through the utilization of dummy companies. 

In fact, Livermore’s million-dollar success during the great turmoil of 1907 was replicated 100-times over on October 29th 1929. 

On returning home that day, he soothed his wife by saying “It was a pretty good day.”  Jesse knew the difference between trading and investing. 

He recognized an investment would not only allow an owner to sleep at night, but that it would also provide comfort and peace of mind because of the constant cash-flow that was generated by the asset. 

In addition, Livermore knew that safety could be achieved without the word “growth” in the equation. 

He was not as successful away from equities, however, and found that money placed in restaurants, oil wells, and dog tracks was not as lucrative as the arena he knew best, the stock market.

Indeed, more than once, his outside forays resulted in bankruptcy. 

If Livermore only stuck to his knitting, as they say, he wouldn’t have been in constant recovery mode. 

Yet, knowing his propensity for risk-taking, he made sure that his wife was well cared for by  purchasing an annuity that would protect his wife’s capital and income for the rest of her life. 

That annuity, Livermore believed, was truly an investment. 

How ironic that arguably the greatest trader of all-time, when push came to shove, would opt for a guaranteed piece of paper when considering his wife’s welfare. 

In this instance, it was not a trade that had gone bad which needed time for recovery.  Rather, this was a clear and decisive decision to actually avoid the stock market altogether. 

Considering the exuberance that is currently being shown today, wouldn’t it be interesting if Livermore was still alive? 

Would he be positioning in the stock market like he did in 1929?  That’s definitely up for debate. 

However, I’m absolutely certain that Livermore would repeat his purchase of the annuity.  That’s because when it comes to protecting loved ones, an investment should not be a trade that’s gone bad.