1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 8

The day after Hoover’s inauguration, the Wall Street trader Jesse Livermore assembled a small group of reporters in his office on the eighteenth floor of the Heckscher Building, at the corner of Fifth Avenue and Fifty-Seventh Street. The man once called the “Boy Plunger”—“plunger” being Wall Street lingo for a reckless speculator—was fifty-one years old, but looked a decade younger, still whippet-thin with just a few streaks of gray in his blond hair.

It had been a long while since Livermore had cozied up to journalists like this, and they were curious about why they had been summoned. What was he going to tell them? Did he have a message about Hoover? Or Mellon? Or the Fed?

Years earlier Livermore had been a ubiquitous presence in newspapers and magazines, burnishing the myth of his innate brilliance as a speculator in stocks and commodities, notorious for betting against certain stocks—short selling. He understood how to use the press to his benefit, planting stories and issuing elaborate denials to provocative questions no one had asked. He’d graced the cover of Time and had his life story lightly fictionalized in the wildly popular 1923 novel Reminiscences of a Stock Operator . Stock market novices and old hands alike snapped the book up, hoping to glean sage advice for making easy money. The first tip Livermore gave everyone was “Beware of stock tips.”

An icon of his time, Livermore had made and squandered several fortunes. In everything he did, the press had been his all-too-willing co-conspirator. He was a celebrity, a rarity on Wall Street, an object of fascination, envy, and suspicion. People craved more than just his trading secrets. They wanted to know about his wives and children and houses and cars, his dining companions, his travel destinations, the whole spectacular life of a man at the top.

But Livermore’s notoriety came with a price. In 1923 it all got to be too much, and he moved his office away from the madhouse of Wall Street to a quieter, discreet location in Midtown, where he spent a half million dollars building the headquarters of his dreams. And he conducted his private life more privately than he had before.

The chosen members of the Wall Street press invited to his office that day could hardly believe their luck. They had heard rumors about Livermore’s mysterious sanctum, but few outsiders had ever been admitted. The building’s doorman was under strict orders to deny that Livermore’s workplace even existed.

Passing through the lobby, the reporters were ushered into a private elevator that opened at the penthouse, Livermore’s floor, where Harry Edgar Dache, his brawny, intimidating personal aide, greeted them. Dache was a former merchant marine who spoke six languages and served Livermore not only at the office but also when he traveled, enthralling Livermore’s two young sons with stories of his adventures on the high seas.

The reporters stared in awe at the large room’s polished mahogany paneling, the luxurious leather lounge chairs surrounding a huge conference table, and the enormous medieval doors that extended all the way up to the ceiling. The room had the ambiance of a gentlemen’s club, but it was all business. The office had eighty phone lines, sixty telegraph machines, and forty stock tickers quietly clattering under glass domes.

Livermore’s private office was behind a closed door, where he had three dedicated phone lines on his huge desk, one connected to the stock market in London, one to Paris, and one to the commodities exchange in Chicago. The rest of his workspace was pristine: only in and out baskets, a pad, and a pencil. Everything else he retained in his head. Through a plate-glass window, he could gaze out to the exterior room and watch the changing prices on the big board.

Livermore gave the reporters time to take in the grandeur of the space, then emerged from his quarters, carrying his small frame with buoyancy. Flashing a smile, he turned to face a wall-length chalkboard next to a catwalk, on which a half dozen “markers”—clerks hooked up to telephone headsets—updated the latest stock prices.

The invention of stock tickers in 1867 not only gave Americans across the country wider access to Wall Street’s capital markets but provided the Street with the means to lure new customers (and potentially take advantage of them). Stock prices were now popular knowledge, and people began to develop their own theories—some wise, most not—about what caused them to rise and fall. Stocks didn’t just move based on profits and losses; it was often about the behavioral psychology of crowds. As Livermore was fond of saying, “ The game taught me the game.”

Livermore was consumed by the ticker—he had one in every home he owned—and kept the thin paper strip that fed from it running through his fingers throughout the day, regardless of what else he was doing. He studied the numbers with the intensity of a scientist, as if he were trying to solve an eternal mystery.

Because the prices on the ticker were, even on light trading days, at least fifteen minutes behind the market, Livermore needed more immediate information whenever he made a big investment in a particular stock or commodity. So he hired personal agents on the floors of various exchanges to call in up-to-the-second prices to his markers, which gave him a powerful edge over other speculators.

After several minutes of chatting with the reporters, Livermore handed them a statement on the coming surge in cotton prices.

“ In my opinion it would be very easy for cotton to duplicate what we have experienced in the copper market for the last six months,” the document read. “Once the speculative public realizes the future possibilities for profit that lie ahead in the next few months in the cotton market, the consumers of cotton will have to contend with the active competition of the public in acquiring cotton for their future needs.”

The man who once decisively recommended that investors pay no attention to the stock tips of other investors but attend only to the reality of the numbers was now offering a tip? Even the most steadfast Livermore followers raised their eyebrows.

In its coverage of the meeting on the following day, the New York Herald Tribune noted:

“Mr. Livermore conversed freely with reporters about the commodities markets, but on the subject of the stock market, he had nothing to say. It is common knowledge in Wall Street that he has confined his operations to commodities, to the neglect of his first speculative love—stocks.”

The Herald Tribune dutifully pointed out that Livermore had “called the turn” in the explosive wheat market in 1924, when the price rose almost $1 a bushel. He had done the same for the cotton market in 1923, as well as for the coffee market during the war.

There’s not much doubt what Livermore was hoping to accomplish. By making a public bullish statement about cotton, he was hoping that investors would rush into the commodity, causing its price to rise and giving him a big gain. But while his cotton bet was all well and good, it wasn’t what the Street cared about. What about that first love? In this raging bull market—the Dow was at 313 that day—what would Jesse Livermore’s uncanny instincts reveal about the stock market? That was what traders wanted to know.

Unlike the Harvard and Yale graduates who occupied the desks at the House of Morgan and other silk-stocking firms, Livermore was self-educated. Born in 1877 on a farm in Shrewsbury, Massachusetts, he left home at the age of fourteen when his father told him it was time to quit school and get behind a plow. With $5 in a pocket of his new suit, contributed by his doting mother, Livermore hitched a ride in a wagon to Boston and got a job working as a “board boy” at Paine Webber, where he posted prices on a board. His work introduced him to bucket shops—and it was there that he found his true calling.

Bucket shops, run by organized crime bosses, did not traffic in real stocks—they merely used the information from real stocks to offer bets, as if they were baseball scores or a horse race. Do you think General Electric is going up or down? Place your bets! As with all gambling establishments, the action was heavily tilted against customers.

Between his work at Paine Webber and speculating at the bucket shops, Livermore developed his own insights about how markets shifted, becoming so good at anticipating moves up and down that local bucket shop bosses eventually banned him. So he headed west to St. Louis, where it took less than a week for bucket-shop proprietors there to recognize him as Jesse Livermore, Boy Plunger. At that point, there was no place left to go but the big leagues, the real game, Wall Street itself.

Livermore called the moment he became a true trader his “spooky story.” In the spring of 1906 he and a friend, also a trader, were relaxing in Atlantic City, New Jersey, ostensibly on vacation from the market. Restless, they strolled into the local branch of E. F. Hutton, unable to go even hours without keeping up with the ticker. “See, strong market, just like I said it would be,” his friend said. “Buy something, J.L.”

At age twenty-nine, Livermore had an account with Hutton and enough money for a $400,000 position. The ticker tape ran through Livermore’s fingers; entranced, he watched the symbols and numbers slip by, seeming to send him a message. Was it a product of his unconscious mind? A premonition? Livermore approached the brokerage assistant and told him, “Sell a thousand Union Pacific short.”

“J.L., why are you putting out a short line?” his friend asked. “The market’s going up!”

Livermore was violating what had been one of his core trading principles—never go against the market. “I don’t know why, exactly,” Livermore answered. “I just think it’s the right thing to do.”

“You know something, don’t you?” his friend said. “I know you never do anything without a reason. In fact, you told me that anyone who trades without a plan, a consistent plan, is a fool. Now you tell me you have no reason to sell UP short. You’re breaking your own rules, for Christ’s sake.”

Livermore didn’t respond but went back to the clerk and told him to short another thousand shares of Union Pacific. His friend tried to lead him out of the office. “You’ve gone crazy,” he said. “Three days of lying in the sun, taking in the ocean air and you’re having a mental breakdown.”

Livermore replied by shorting another thousand shares.

With the three order slips in Livermore’s pocket, the two men left the brokerage. That afternoon they checked the tape. UP’s stock had risen two points. “See, J.L.,” his friend crowed, “I told you—the market’s up, and you lost six thousand dollars for your foolishness.”

The next day Livermore returned to the broker’s office and shorted another two thousand shares of Union Pacific. By now his margin borrowing exceeded $400,000, so if he bet wrong, he’d be wiped out. He returned to New York and woke up the following morning to read the newspaper headlines about the devastating earthquake in San Francisco. The market began to fall, and as the earthquake crisis turned into the Panic of 1907, Livermore kept shorting the market, riding the streak. On October 24, 1907, a date he would never forget, he made $1 million in a single day.

Livermore’s instinct was to keep the pressure on. He was now a big player, and recognized as one by the Street. The market was falling so hard and so fast that people worried about its survival. A friend, acting as a proxy for J. Pierpont Morgan, advised Livermore that it was time to stop because he was causing too much damage. For probably the first time in his life, Livermore recognized an authority greater than his own instincts. He covered his shorts, and as the market stabilized, he began to buy as the market rallied. When the Panic of 1907 was finally over, he had $3 million in cash. He would later tell his two sons that J. Pierpont Morgan’s asking him a favor was one of the most significant moments of his life. He was a plunger no more but a true speculator.

Over the next few years Livermore spent millions on wives, cars, and houses. Nothing was ever enough. Only the market could give him the feeling of self-worth that he craved, and the market was a fickle mistress. He suffered debilitating losing streaks. When investors piled into the market following the 1921 mini-crash and stocks went on their unbroken ascent, Livermore didn’t follow them, to his financial detriment. He knew better than anyone how patently delusional it was to believe that good times could last forever, and he could not bring himself to believe in the current boom. At various points in 1925 and 1927, he had gone bearish on stocks, only to hastily unwind his short positions when the market refused to buckle.

To understand the market, Livermore studied human nature, reading Freud, Jung, and Aristotle, contemplating the mystery of the unconscious mind. His method didn’t lend itself to easy explanation, and even he seemed unsure of how to make sense of it.

“ Anticipation of coming events is the whole thing,” he once told an interviewer. “When I have my mind made up about this, I wait for the psychological moment.”

Though Livermore preferred to play lone wolf, he and William Durant had joined forces in a few audacious pools. His share was estimated to total $20 million, which bought a lot of the luxuries he indulged in, including a yacht or two that he docked in Palm Beach.

Livermore’s good friend and fellow speculator Bernard Baruch also frequented Palm Beach. Born in South Carolina in 1870, Baruch was the son of a Confederate Army surgeon. His Jewish family left the restrictive postwar South for New York City. He graduated from City College of New York and went straight to Wall Street, joining the brokerage firm of A. A. Housman & Co. Within a few years he scored a major triumph by shorting the stock of American Sugar Refining, which netted him a profit of over $60,000. With the proceeds, he bought a seat on the Exchange and started his own firm, becoming known as a ruthless bear raider—again, a short-selling specialist.

Unlike Livermore, Baruch banked his winnings and made a bid for respectability. He wanted to be taken seriously in the world. As his fortune grew, he began a career of public service under Woodrow Wilson, who appointed him to the powerful War Industries Board, where he played a key role in the nation’s economic mobilization during World War I. With a thick coif of white hair and standing six foot five, Baruch was a dashing figure who—like Livermore—loved to chase beautiful women.

When the two men encountered each other in Palm Beach one winter day in 1929 as the market continued to climb, Baruch admitted he was wary. Perhaps it was time to sell out his positions and go hunting at his plantation in South Carolina, far from the brokerage houses and telephones. “J.L.,” Baruch told his friend, “looks like it’s time to go grouse shooting.”

On Sunday, March 24, 1929, Livermore, like everyone else on Wall Street, was waiting to hear what the Federal Reserve Board had been meeting about over the weekend and whether it would make a statement about the market. Since the beginning of the year, the Dow had risen as much as 7.3 percent but had fallen back down amid the Fed’s effort to put a damper on speculation. The Dow was up just 2 percent for the year. The market was more erratic; it seemed jittery, which made traders jittery.

That same day, The New York Times ran a story that, to skeptics like Livermore, signaled a market top. The article was titled “The Magnet of Dancing Stock Prices” and it stated plainly, “The people who know least about the stock market have made the most money out of it in the last few months. Fools who rushed in where wise men feared to tread ran up high gains. Even such a veteran of market campaigns as Charles M. Schwab has declared that probably the old-timers, who usually play the market by note, are behind the times and wrong, and that the new crop of speculators who play entirely by ear are right and that a new speculative era has dawned.”

Livermore was always looking for signs that the wisdom of crowds had become witless. He strongly believed in the curse of consensus—and here it was.

The past five years of an almost constantly rising stock market had made the life of a short seller like Livermore feel almost impossible—so much so that the newspapers were describing him as in “practical retirement.” It seemed almost too dangerous to bet against a market that was levitating. Even his bullish cotton trade and promotion in the newspapers weeks earlier hadn’t worked: “ The fact of the matter is Mr. Livermore’s campaign to attract a huge following with frantic buying, was a comparative failure. He never had the following he anticipated, and there was nothing approaching frenzied speculative buying,” a newspaperman wrote.

The next morning, Monday, March 25, as his driver chauffeured him into the city from his home in Kings Point on the Great Neck peninsula, Livermore’s mind was spinning. He saw an opportunity. He could feel it. He was convinced the stock market was about to tank.

With an hour and a half before the market was set to open, Livermore’s traders, some twenty of them, were summoned into his office, where they packed into his inner chamber. He’d been mulling over a potential strategy for this very moment for the past two weeks. Now was the time to execute.

“ Go, go, go!” Livermore said. That was all they needed to hear as they raced to their posts.

When the market opened at 10 a.m. with the bell sounding on the floor of the New York Stock Exchange, Livermore’s traders swung into action, grabbing phones to brokers, buying and selling shares of designated stocks—all meant to distract away from his bigger plan: Other members of his team were quietly launching a massive short assault.

By the end of the day, they had shorted $150 million worth of shares. Against his stockpile of $7 million, Livermore had maximized his margin to its absolute limit. He had bet it all on his instincts. If the market rose, he’d be wiped out.

Sure enough, the next day stock prices fell almost vertically. At 2 p.m., Livermore reconvened his team. They had one hour to buy everything back.

It was a perfect plan, perfectly executed. In less than twenty-eight hours Livermore’s strategy had made a profit of $8 million.

And he’d only just begun.