A Tale of One of Wall Streets Most Legendary Traders
One of my favorite books is Reminiscences of a Stock Operator by Edwin Lefèvre, which is essentially an autobiography of Jesse Livermore, one of Wall Street’s legendary traders. Livermore made his first fortune in the 1907 crash and an even bigger one in 1929.
The 1929 stock market crash officially started in late October, with three consecutive down days. It began on Black Thursday when a record 12.5 million shares traded, causing an 11% drop, which was temporarily stabilized when J.P. Morgan and other bankers intervened. But that wasn’t enough. The following Monday, the Dow Jones plummeted 13%, followed by another 12% drop on Black Tuesday—marking the peak of the panic.
During this turmoil, Livermore was one of the few traders who thrived, making astronomical profits through short-selling. By the end of Black Tuesday, his earnings were rumored to exceed $100 million. When he arrived home that evening, exhilarated from his success, he found his wife in a panic. She had assumed they were ruined, fired the entire household staff, and moved their furniture into the barn. Livermore calmly reassured her, saying, “Dottie, we’ve made more money today than ever before in our lives. Call the staff back—we’re richer than ever!”
The crash followed the prosperity of the Roaring Twenties, which, in many ways, resembled modern bubbles. There was rapid economic growth fueled by new technologies, easy credit, and widespread optimism. Stocks soared as investors leveraged margin debt, convinced the market would rise indefinitely. Livermore, however, had seen these cycles before and identified three warning signs:
- Overvaluation – Stocks were trading at unsustainable price-to-earnings ratios.
- Excessive Speculation – Margin debt had reached dangerous levels, increasing the risk of a collapse.
- Market Psychology – The euphoric sentiment suggested a top, priming the market for a downturn.
Today, I see similar red flags. The S&P 500’s price-to-book ratio was just shy of its record high from 2000. Margin debt hit all-time highs in January, and market psychology was extremely bullish a few months ago, with Bitcoin surpassing $100,000 and AI stocks surging. While optimism remains, it’s not as extreme as in past bubbles like 2000’s dot-com frenzy or 2007’s housing mania.
Because of this, I don’t expect a dramatic crash. Instead, I think we’ll see a slow, grinding market that moves sideways, gradually bleeding off its overvaluation.
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