Advice From The Trader Who Made $1 Billion In 1929...

Authored by Simon Black and Tim Price via,

In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.

Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.

The investment had already made Newton a lot of money, he was up more than 100% in a very short time.

In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.

Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.

There was only one problem: the share price of the South Sea Company kept climbing.

All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.

The market then collapsed, and he lost virtually all his life savings.

The experience is said to have given rise to his bemused response:

“I can calculate the movement of stars, but not the madness of men.”

*  *  *

It’s now been roughly ten years since the Global Financial Crisis began.

In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.

The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.

Stocks are at all-time highs. Bonds are at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.

Yet asset prices keep climbing.

Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently announced that he is closing his hedge fund.

Hendry is a famous critic of this monetary absurdity and consequent asset bubble.

It wasn’t supposed to be like this.. markets are wrong,” Hendry told investors.

Of course, the market is under no obligation to be right. Ever.

Hendry’s view is accurate– nearly every objective metric shows that the market is incredibly overpriced.

Clint Eastwood’s infamous character Dirty Harry once remarked that a man needs to know his limitations. We think we know at least some of ours: we can’t time markets.

And the only thing we know with any certainty, as sure as night follows day, is that there are always corrections– both booms AND busts.

A decade’s worth of QE and ZIRP has fuelled a runaway train, and at some point there will be a correction.

Does it make sense to stand in front of the train? Or is it better to, as Isaac Newton did, leap aboard for some final thrills?

We prefer neither.

Instead we’re diversifying as pragmatically as we can, working diligently to find undervalued companies run by honest, talented managers.

It requires more hard work and patience than buying some overpriced index fund or whatever the popular investment du jour happens to be.

But nobody ever said this investing business was supposed to be easy.

Earlier this year my publishers invited me to write the foreword to their definitive edition of Reminiscences of a Stock Operator, a thinly disguised biography of the legendary trader Jesse Livermore.

Livermore was extraordinary. Born in 1877, Livermore ran away from home as a child and soon began trading stocks.

By the time he was 20, he had already amassed a fortune of $3 million, more than $75 million in today’s money.

Livermore sold short, i.e. bet that stock prices would fall, just prior to the 1907 crash, as well as the 1929 crash.

His bets were so lucrative that, going into the Great Depression, Livermore had a fortune of more than $100 million, or about $1.4 billion today.

But Livermore wasn’t just great at making money from overheated markets. He was also a master of losing money.

This book is widely and rightly regarded as an investment classic. It is also crammed with valuable observations about the practice of speculation and successful trading.

Among them, the importance of being patient and disciplined:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.”

Sitting. As in, doing nothing. As in… neither standing in front of the train, nor jumping on board.

Hedge fund managers like Hugh Hendry don’t have this option. They have to be invested. They have to report to their investors every quarter… and if they’re not making money, investors bail.

But as an individual, you are not accountable to anyone but yourself.

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity.

Do you have a Plan B?


Buzz Fuzzel asteroids Tue, 09/19/2017 - 10:17 Permalink

"Instead we’re .... working diligently to find undervalued companies run by HONEST, talented managers."Honest?  That's the over arching problem.  In our post modern world where everyone is sold out to moral relativisim we no longer have a viable definition of honest.  In our make your own reality world the word honest has become a meaningless word.

In reply to by asteroids

vato poco stormsailor Tue, 09/19/2017 - 12:17 Permalink

not all that sure they should be pitching the Jesse Livermore Lifestyle. IIRC, he ate a bullet one fine day. made and lost 3 - or more - vast fortunes, and he evidently never once thought to throw $10 or $20 mil into an irrevocable trust.I tend to suspect it'd be more fun to die from "fucking too many big-tittied homewreckers while snorting mucho cocaine" than "sudden bulleticular brain pan evacuation", but maybe that's just me

In reply to by stormsailor

BarkingCat asteroids Tue, 09/19/2017 - 11:21 Permalink

I have been pretty much staying out since 2008 with only going in soon after the crash for a few bites here and there. I've been sitting on those positions and most of them have worked out really well. In retrospect I should have jumped back in with both feet after the big crash. However in all fairness even after the crash that markets will overvalued considering Obama was President and he was sitting on existing bankruptcy laws as well as not enforcing security laws. I swore I would not get in to the stock market until either Obama was gone or Corzine was in jail. However I could not have predicted QE and its effect on everything.That is really the big difference between now and anytime before. When Isaac Newton was observing the markets back then the monetary Supply was not in the hands of tribal shysters. Had to been an ECB or the Fed back in those days you can bet your ass that Isaac Newton that would not have lost his money as his money was invested what would have been considered today a corporation is too big to fail. Fuck you Bernanke and fuck you mister Yellen.

In reply to by asteroids

J S Bach HockeyFool Tue, 09/19/2017 - 09:35 Permalink

My advice to greedy speculators as a "Plan B" is my "Plan A".  That is, always look at money as merely a tool of barter.  It is a vehicle of exchange... nothing more.  Yes, it is important to purchase the necessities of life, but getting it shouldn't be one's primary goal and love in life... for you can always make more.  I have a wealthy friend who confessed to me recently that he can't stop "wanting" more and more money even though he has admitted having more than enough to live out the rest of his life in relative ease and comfort.  Cherish and value that which you can take with you beyond the grave.  The love of your family & children... an appreciation for the indescribable beauty of God's creation... the great art bequeathed to us by our ancestors (especially music) which feeds your soul every passing day.  These are what give JS Bach true satisfaction in this brief lifetime.

In reply to by HockeyFool

Rabid Bear J S Bach Tue, 09/19/2017 - 11:29 Permalink

Paper has no value. I won't get into the occult here.....but I will say this.....the value is not in the paper you collect, it is in the energy you give. When you worship the system's paper....that is your God, and you invest all of your time and energy into it. Taxation is also hidden in inflation....and the more people like your friend who they can brainwash into giving his energy (life essence) for their cause....the more the Elite can inflate the currency causing your friend to spend more hours chasing the cheese dangling from the end of a stick glued to his head.....the more the elite can relax on the beach or spend time molesting children in their know the typical stuff they do. Your friends addiction....ensures that those above him can continue to gain in power while doing nothing. The value that you friend puts in this worthless what keeps the heart of this Satanic system pumping.....there I said it. 

In reply to by J S Bach

7thGenMO Rabid Bear Tue, 09/19/2017 - 12:03 Permalink

Wow! - good stuff Rabid Bear.  Hopefully the vitriol will soon be appropriately applied to the the Jeffrey Epstein's of this world.I would interject, as I have some acquaintance with Europeans with Marxist leanings that came solely for economic reasons, that the elite count on being able to continually import desperate souls from around the world to chase the money god (their "worthless paper") in search of the elusive American dream.  Until the borders are secure, the elite will continue to apply pressure to traditional liberty loving Americans using immigrants that are more pliable to their desires.  

In reply to by Rabid Bear

Global Douche J S Bach Tue, 09/19/2017 - 12:20 Permalink

My father is the total antithesis of this! The man, now in his twilight years could be happy if he divorced his wife (not my mother) and gave her half of what he has. He could then be happy and free to do whatever the hell he wishes with the time he still has, even gaining more time if he simply took action now! Instead, he's bitter and stubborn as he doesn't want her to get this money. He can't take any of it with him upon his demise, yet he ignores the Maker's Memo since he has no belief whatsoever to begin with. No, there's no talking to or with him, his mind is set and his attitude has keenly crafted a bitter bitch of her over the years. Well, time continues passing on with more leaves of the calendar winding up in File 13.Scores ago, he told his three young sons that we wouldn't get a thing from him when he died. Guess what? I'm already way better prepared than most and not relying on either him or the Bankster$ not stealing any 401k with government blessings whom most blindly entrusted. I'm also not attending his funeral when he reaches room temperature and that's FINAL! I saw him last when his mother passed under a decade ago. Of course he refuses to say anything to me. I'd rather keep my soul than be forever stained by his fiat or association for that matter. In fact, I pray he gets his own fucking pyramid and Uncle Scrooge pays a visit, shoveling that man's money onto his corpse, filling his casket. If being dead as a doornail with all the time in the world to rot in filthy Federal Reserve notes make him happy, why should I deny him any happiness? I've both earned and lost money along the way, yet I spend it on things making me very happy. I'll once again smoke weed when I retire. I pray when I retire to the "gomer home" that I'm still healthy enough to scout the bitches and regularly score. This "being sad" bullshit is for the Jamie Dimons who worship the wrong damned pyramids on these notes, the pyramid schemes of the Fed which always goes to Hell. That handbasket is nearly overflowing and Satan demands his share. Although I don't want my father sinking with it, I can't do a damned thing about it either.As mentioned here repeatedly over time, I do have BTC and PM's outside the banking system. Fuck him. I'm already set. At least I feel better I've vented about this. There's a lot on my mind as my job either disappears or changes within 2 weeks, but I can easily pay for an entire move and any deposits to get a fresh start, something which he HAD the chance to make. Don't be him.p.s., The three B's of Classical were all geniuses!

In reply to by J S Bach

Global Douche Zorba's idea Tue, 09/19/2017 - 13:04 Permalink

I'll hang strong (or "hang high" trying) through this. I'd have way more respect for the guy if he took on the challenges as you have! He had it too good. If he stayed a garbage man with no help in landing a decent union job, that alone could've been the humbling he needed. Instead, his arrogance from good $$ went almost supernova and he lost any friends he had. I later learned of the abuse he received as a kid brought on much of it. His father was never mean to me. I was by far his favorite grandson.You get my admiration for making things easier for your kids to attend college. Admittedly, he did offer to pay for some college if I moved to a specific area and school. Ironically, my former career got me in that town for nearly a decade, but I didn't attend school then and didn't pursue it until '09. I'm the only one of my siblings to earn a degree and am considering making a 4-year of it, especially if I move back to the Upper Midwest. 

In reply to by Zorba's idea

Fireman Tue, 09/19/2017 - 09:07 Permalink

Tulips are still falling up even as apples fall down...yet Mr Newton's greed got him in the end.There will be a lot more like him very very sooooon. Onward to the $hakedown!

Spaced Out Tue, 09/19/2017 - 09:13 Permalink

Very nice article, thanks guys."In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors."What a great line!Bookmarking

Hammer823 Moneyswirth Tue, 09/19/2017 - 10:13 Permalink

I have no idea why anyone would short a market, as a whole, that is rigged to go up.Everything is always done to prop the market up or make it rally.Corporate stock buy backs, non gaap earnings, beating reduced expectations ,federal reserve rate manipulationfederal reserve 'quantitative easing' , federal reserve jawboning , central bank futures purchases, etc.Why would anyone want to bet against a rigged game? 

In reply to by Moneyswirth

Rabid Bear Tue, 09/19/2017 - 09:38 Permalink

I used to trade stocks in the 6 figure range. I know that sum is a lot for some of you and not a lot for others....but for me it was exciting. I'd watch the rollercoaster ride of the stocks going up and down by  tens of thousands of dollars. It was a thrill.....but that's all I got out of it....a thrill. Despite my education and background in Finance....I can not predict the unpredicated, regardless of how much I researched. I decided to just walk away from trading one day when I realized my portfolio basically broke even for the year, and vowed to never go back. I started my own company....buying and selling merchandise from wholesalers and manufacturing my own products. Over time I realized something....when I pay to have an item manufactured and shipped to me.....that item goes inside of my warehouse....meaning that I've already made a profit (or at least broke even), and it can never go down from there unless the warehouse burns down. In trading can buy something, and have your money stolen from you the second after you purchase the stock. Over time buying and selling items and manufacturing items has made me far more money than trading stocks ever did. I always remember the saying "Nothing is for free"....I might have to invest a little more time and money packaging and shipping items.....but it's better than gambling and not investing any time at all. There is also something far more rewarding about being able to see and touch things you purchase before selling them. If the stock market crashes...for a while investors will have nothing.....but I will still have a warehouse filled with merchandise that I can sell or barter for whatever I need.

Rabid Bear TeethVillage88s Tue, 09/19/2017 - 12:41 Permalink

I live in Texas so warehouses are cheap and easy to come by. I do not own an expensive's just a decent warehouse in a high security area. Even though I do not have an expensive warehouse...I'm located in the same location as other larger companies warehouses, and benefit from their surveilance/security. When you say "expensive" I'd say that depends on what you are selling and how many products you can move a month. I have several subscriptions to Wholesalers/Manufacturers that most people would not pay monthly for.....but those subscriptions give me access to a range of new expensive merchandise. I even pay monthly subscriptions for software programs that allow me to track items and updates me on how quickly certain merchandise sells on different websites. When all of these expenses are added up does it get expensive? Yes....but the benefits far outway the cost. Several of my competitors might not pay the subscriptions or buy the software to save them money.....but if I'm moving twice as many units as they are....does it really benefit them to cut back? I don't think so. Just start out small.....I was sending stuff to my house when I started, you don't have to start out with a warehouse....just take things slow, learn from your mistakes, and gradually work your way up to a warehouse. I would not tell someone who starts out doing what I'm doing to buy a warehouse.....nor would I tell them to spend more than $10k on their first purchase.....because they're going to make mistakes, that's just what happens in the beginning. However, once you are as comfortable as I see units in terms of cost.....and I know that X amount of units will pay my bills so those units need to be covered within the first week....that way we can just go at our own pace for the rest of the month. I don't push people hard, or expect unrealistic sales goals like the world I came from before I did this.....I just want people to come to work and enjoy what they do. If they just want to make enough money to just feed their family I'll put them in a certain position and give them certain goals and if they are hard core like me I'll put them in a different position with other goals. Maybe I've just been lucky...but we've never worried about the bills to be honest. I think that has to do with me not spending beyond my means. Also, I'm not married nor do I have someone who does might approach my situation differently than I do. 

In reply to by TeethVillage88s