The GameStop Phenomenon: What Would Jesse Livermore Have Done?

The GameStop Phenomenon: What Would Jesse Livermore Have Done?

September 29, 2023

The GameStop Phenomenon: What Would Jesse Livermore Have Done?

 

The stock market has been a playground for fortunes—both made and lost—since its inception. Earlier this month, the movie "Dumb Money" took us back to the epic journey of GameStop's stock in 2021. While the story itself is riveting, what makes it more fascinating is viewing it through the lens of Jesse Livermore, a master speculator from the early 20th century.

Who Was Jesse Livermore?

For those unfamiliar with the name, Jesse Livermore was a legendary figure in Wall Street, active during the early to mid-20th century. Born in 1877, Livermore started his trading career at the age of 14 and became one of the most successful—and controversial—traders of his time. His life was filled with dramatic ups and downs, including making and losing multi-million-dollar fortunes several times over. Livermore was famed for his deep understanding of market psychology and his ability to capitalize on market trends, often against popular opinion. One of his most legendary trades was successfully shorting the stock market before the Crash of 1929, earning him a fortune. His trading strategies and market insights are meticulously detailed in the book "Reminiscences of a Stock Operator," a must-read for any serious trader or investor. Livermore also authored the book "How to Trade in Stocks," where he outlined his trading rules, many of which remain highly relevant today.

What Can Livermore Teach Us?

What can Livermore's strategies teach us about the GameStop saga, and more importantly, about modern-day wealth management?

The GameStop Backstory: A Brief Recap

In 2021, GameStop (GME), a struggling video game retailer, became the focal point of a financial tug-of-war. Hedge funds bet heavily on the company's downfall by short-selling its stocks. In contrast, an army of retail investors coordinated through Reddit's r/WallStreetBets to buy shares and drive up prices. The result? A market phenomenon called a "short squeeze," which catapulted GME's price to unprecedented heights and inflicted heavy losses on several hedge funds.

Jesse Livermore: The Man Who Understood Mass Psychology

Jesse Livermore, one of the greatest traders of all time, was keenly interested in the "psychology of the market." He understood that stock prices were driven by human emotions—fear and greed. Livermore would likely have been intrigued, but not surprised, by the collective force exerted by Reddit users on GME's price. He once said, "The stock market is filled with individuals who know the price of everything, but the value of nothing."

Lessons from Livermore for Today’s Investors

  • Speculation vs. Investment: Livermore distinguished between these two. He speculated with a calculated risk, based on market trends and behavior. While many retail investors in GME were betting on a trend, it's crucial to understand the high-risk nature of such plays.
  • Timing is Everything: Livermore emphasized the importance of entry and exit points. While some investors profited handsomely from GME, many who joined late faced significant losses. Timing, as they say, can be the difference between fortune and folly.
  • Avoiding the Herd Mentality: Livermore often said that following the crowd usually leads to losses. The GME saga saw many investors jumping on the bandwagon without analyzing the risks, a behavior Livermore would caution against.
  • Emotional Discipline: One of Livermore's famous adages was, "Markets are never wrong; opinions often are." He advised traders to keep emotions at bay and focus on facts and trends.

The Takeaway for Wealth Management in 2023

Livermore’s wisdom is timeless. It tells us to approach trading with a disciplined strategy, rather than succumbing to the euphoria or despair that can be amplified by social media. As we continue to navigate an ever-changing financial landscape, the lessons from both GameStop and Jesse Livermore serve as essential guides to separate the wheat from the chaff and to make informed, judicious decisions.

Further Reading

If you've found a growing interest in the realm of investing, fuel that passion by exploring further insights on the McKee Financial Resources Blog (mckeefinancialresources.com).

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Article written by: Anthony Owens

Copyright © 2023 Anthony Owens @ Thriving Wealth Hub.

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