The 2025 Bear Market Bet

Since I am speaking about history, let's take a trip back in time and explore the story of a trading legend..

The Great Bear of Wall Street

• Early Life and Career: Livermore began trading at a very young age, running away from home to work in Boston as a "chalk boy" at a brokerage firm. Here, he learned about stock prices and market behavior by observing the ticker tape.

• Trading Techniques: Livermore was known for his focus on price action and market trends rather than fundamentals. He developed rules like "buying on the way up" and "selling on the way down," emphasizing the importance of cutting losses quickly and letting profits run.

The 1929 Trade:

• The Build-Up: Throughout the roaring twenties, the stock market was in a bull market, with prices inflating rapidly. Livermore, skeptical of this unchecked growth, began to see signs of an overbought market, including high valuations, excessive speculation, and margin buying.

• Market Observation: Livermore was an astute observer of market sentiment. He noticed the speculative frenzy, the high leverage through margin buying, and the general overvaluation of stocks. His experience taught him to recognize when a market was ripe for a significant correction or crash.

• Building Short Positions: Livermore didn't just short the market at one point; he layered his short positions over time. He began shorting stocks in the summer of 1929, as he saw the market reaching unsustainable highs.

• Stocks Chosen for Shorting: Among the stocks he shorted were:
• RCA (Radio Corporation of America), which was one of the darlings of the bull market due to the radio boom.
• Montgomery Ward, a major retailer whose stock was also considered overvalued.
• American Can, which was emblematic of the industrial stocks that had seen significant price inflation.

• Black Thursday and Black Tuesday: On October 24, 1929 (Black Thursday), the market started to collapse, but Livermore kept his shorts, believing the downturn was just beginning. The real devastation came on October 29 (Black Tuesday), when the market plummeted, fulfilling his bearish outlook.

• Covering Shorts: Livermore did not cover his shorts immediately after the initial drop but waited for further confirmation that the market had indeed turned. This patience was key to maximizing his profits, as the market continued to decline sharply over the subsequent weeks and months.

• Profit Realization: The profits from his short positions are estimated to be around $100 million, which was an astronomical sum at the time. This was partly due to the sheer scale of the market drop and his significant exposure through the layered short positions.

• Risk Control: Livermore was known for his rule of cutting losses quickly but wasn't immune to the pitfalls of overconfidence. His ability to manage risk during this trade was exemplary, but his later life showed the dangers of not adhering to one's trading rules consistently.

• Psychological Aspect: This trade was not just about technical skill but also about psychological fortitude. Livermore had to maintain his bearish stance against the prevailing bullish sentiment, which required significant confidence in his analysis and resilience against the psychological pressures of going against the crowd.

• Legacy: The 1929 trade contributed significantly to Livermore's legend. However, it also set a benchmark that was hard to replicate, leading to a series of ups and downs in his trading career. His approach to short selling, especially in such an overbought market, became a case study in how to capitalize on market downturns.

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