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Learning From The Masters

04/30/01 05:29:35 PM PST
by James Maccaro

Bernard Baruch and Jesse Livermore were the two best-known Wall Street personalities of their eras. Their contrasting approaches to investing and to life still provide useful lessons to the investors of today.

To many, Jesse Livermore epitomized the "Roaring '20s." He made fortunes and lost fortunes and lived like royalty, then watched his kingdom collapse during the Great Depression of the 1930s. Bernard Baruch, in contrast, made his pile of loot slightly earlier and played it safe throughout the 1920s when Wall Street speculators were on fire with their schemes and dreams. Even now, their experiences can help you; getting to know both legendary speculators and their approaches to the markets can help you learn to invest wisely.


Unlike Livermore, who couldn't spend his money fast enough and always wanted more, Baruch did not hunger for palatial grandeur; he was satisfied with mere wealth. He started his career as an office boy, but soon became a bond salesman and stockbroker. After amassing a fortune variously estimated between $1 million and $20 million (in 1912 terms, certainly enough money to support his lifestyle for the rest of his life), he retired from active stock market speculation and became a conservative investor. In fact, he was more famous as a former investor than as an active investor. During World War I, he was appointed chairman of the War Industries Board. Afterward, he became a well-known advisor to Presidents, beginning with Woodrow Wilson. Baruch was a close advisor to Franklin Roosevelt during World War II and was extremely influential with regard to US atomic energy policy in the late 1940s and 1950s. He continued to advise Presidents as late as during the Kennedy administration. He died in 1965, an honored and widely respected man.

Baruch, who is perhaps best known for his observation that when even shoeshine boys are buying shares, it's a sure sign that the stock market has peaked and it's time to get out, was optimistic about the US economy even during the Great Depression. He wrote that when stock prices are low, as they were during the Depression: "People come to feel that better times will never come. They cannot see through their despair at the sunny future that lies beyond the fog. At such times a basic confidence in the country's future pays off, if one purchases securities and holds them until prosperity returns."

In his autobiography Baruch: My Own Story, Baruch set forth a statement of his investment philosophy. "We all have to take chances in life. And mankind would be vastly poorer today if it had not been for men who were willing to take risks against the longest odds." He felt that "the constant problem of the speculator or analyst is disentangling the cold, hard economic facts from the rather warm feelings of the people dealing with these facts." The key to stock market success, in other words, is to detach our perception of the facts from our own emotions.

Baruch developed several rules that he applied when analyzing the stock market:

  • Beware of "tips" and "inside" information. His experience told him that such information more often than not represented unbridled optimism rather than cold, hard facts.

  • Do your due diligence. Buy a stock only after becoming familiar with the company's management, competitors, earnings, and prospects for growth.

  • Pick stocks in fields that you know about. He advised: "Don't try to be a jack of all investments. Stick to the field you know best."

  • Monitor your investments regularly. Make sure that changing circumstances have not altered company prospects.

  • Do not overdiversify. If you own too many stocks, it could be difficult to keep track of them all. The best approach is to have a few investments that you can watch closely.

  • Do not be fully invested in the stock market. Keep some of your assets in cash as a reserve. It is a mistake, he argued, "to trade beyond your financial resources and try to run up a fortune on a shoestring."

  • Do not try to buy at the bottom and sell at the top. Baruch recognized that this is seldom possible, even by the so-called experts. Likewise, he advised that if a stock's price declines after your purchase, be willing to take a loss. According to Baruch, one of the worst mistakes anyone can make is to hold blindly and refuse to admit that his or her judgment has been wrong.

  • Keep the tax consequences of your investments in mind. Your aim should be to maximize the aftertax returns of your portfolio.


    Baruch's life can be contrasted with that of his contemporary, Jesse Livermore, who personified the great bull market of the 1920s. Livermore began his Wall Street career when he was a teenager, as a marking boy for the Paine Webber brokerage firm. His job was to post prices on chalkboards in a brokerage office so customers could keep track of their investments. He began speculating in the stock market with his meager earnings and reportedly accumulated the then-remarkable sum of $1,000 by the time he was 15.

    Livermore's all-or-nothing approach to investing earned him the sobriquet "the Boy Plunger," of which he was proud. However, many years later he was called "The Bear of Bears" - a title he did not care for - because of his alleged involvement in several bear rings. Although Livermore denied using such tactics, at the time it was common practice for a group of stock manipulators to cause a stock price to reach astronomical prices through sham sales and by spreading unsubstantiated rumors. These groups would then sell short? at the peak to collect huge profits when the stock price collapsed. Securities regulations instituted after the crash of 1929 made this unsavory gambit illegal.

    During the first half of the 20th century, the
    stock market saw the best and worst of
    times - no different from the present.

    In any case, by the late 1920s, Livermore had one of the largest incomes of any person in the United States and lived in regal splendor. However, his risk-it-all philosophy led him to disaster many times, and in 1915 he was bankrupt. Though he was deeply in debt, at that point, Livermore borrowed more money and purchased huge blocks of Bethlehem Steel and US Steel. This turned out to be an astute move, as World War I greatly increased the demand for American steel. From this, Livermore made enough to pay off his debt with as much as $1 million to spare. He was generally bullish from 1921 to 1927, thereby making great profits.

    Afterward, however, Livermore's legendary luck turned against him. He became convinced that stock prices had become too high in the late 1920s and became a bear, betting huge amounts on a stock market crash. But 1927?29 was arguably the greatest bull market in US history, and Livermore lost huge sums. Of course, he was correct about the stock market being overvalued, but his timing was off. He was vindicated by the market crash of October 1929, but by then it was too late. He had to cover his bets during the spring and summer of 1929, when stock prices were at their peak.

    Not only that, Livermore did not enjoy any benefits as a result of having foreseen the Great Crash. He was convinced that the market would immediately bounce back after Black Monday (October 29, 1929). He became bullish again and lost what was left of his fortune in the bear market of the early 1930s. This time, he did not recover. On November 28, 1940, Livermore, who by then seemed like a relic from another era, checked into the Sherry Netherland Hotel at Fifth Avenue and 59th Street in New York City and killed himself.

    Livermore's many triumphs reflect the huge profits that are possible when stock market trends are accurately anticipated. However, his many defeats show that even an astute investor is not always right; an element of caution is best.

    Ironically, Livermore recognized this fact too late. In How To Trade In Stocks (published in 1940, the year he died), he advised that "a speculator should make it a rule each time he closes out a successful deal to take one-half of his profits and lock this sum up in a safe deposit box." If Livermore had followed his own advice, his safe deposit box would have been overflowing.

    Livermore's methods can be summarized in five rules:

  • Always follow the trend. Do not "bet against the market" by trying to anticipate when it will change directions. "As long as the stock is acting right, and the market is right, do not be in a hurry to take a profit. Let it ride and ride along with it."

  • Do not trade every day. "There are only a few times a year, possibly four or five, when you should allow yourself to make any commitment at all. In the interim you are letting the market shape itself for the next big movement."

  • Be willing to take small losses. "Profits always take care of themselves, but losses never do."

  • Be alert for the "danger signal to tell you to step aside and convert paper profits into real money."

  • Do not overdiversify. Only invest in as many stocks as you can monitor.

  • Livermore summed up his stock market philosophy by stating that "stock market intuition is like that of a bridge player. After a man has played bridge all his life, he knows when to finesse instinctively." Livermore's life, however, provides a cautionary tale that proves that finesse, even that of a seasoned professional, can be overwhelmed by stock market forces beyond any investor's control or anticipation.

    Yes, even seasoned speculators make mistakes. Whether you are a passive or aggressive investor, prepare yourself for achieving desired results by thinking through all your risks.

    James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. He can be reached at

    Baruch, Bernard [1957]. Baruch: My Own Story, Buccaneer Books, Inc.
    Grant, James [1983]. Bernard Baruch: The Adventures Of A Wall Street Legend, John Wiley & Sons.
    Livermore, Jesse, and Richard Smitten [2001]. How To Trade In Stocks, Trader's Press, Inc. Originally published in 1940.
    Smitten, Richard [1999]. The Amazing Life Of Jesse Livermore, Traders Press.

    Copyright © 2001 Technical Analysis, Inc. All rights reserved.

    James Maccaro

    James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. James A. Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. He may be reached at

    Address: 154-61 22nd AVE
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