After the First World War broke out in Europe, the commodities prices went up as a result of wartime inflation. Over the course of the prolonged conflict, the prices of many commodities doubled, tripled or even quadrupled to their pre-war levels. The great commodity bull market was well underway, and everyone was busy buying commodities. However, there was one notable exception that did not go up with the rest of the market, and it was coffee.
The low price of coffee was primarily a result of oversupply from abroad. Since the war had closed up the European market, coffee cargoes which were originally meant for the Europeans had no choice but to change their destination to the United States. As a result, there was an excess supply of coffee in the American market, and the price was forced to stay at a low level. However, Livermore studied the situation and believed that it was about to change.
During the First World War, the Germans were notorious for their policy of unrestricted submarine warfare. All merchant ships sailing in the German war zone, including those from neutral nations, would be attacked by the German submarines. This resulted in a string of attacks on merchant ships, and greatly reduced the number of ships available for commercial transport. Livermore believed that, with the increasing employment of these submarines by the Germans, the coffee cargoes going into the United States would diminish as well. Hence, he concluded that the coffee price would soon go up.
Livermore was so confident in his prediction in coffee that he did not consider buying coffee a speculation. He thought it was a prudent investment which would make a good profit if he was patient enough to wait. He started to buy coffee in the winter of 1917, and began his long wait for the coffee price to go up.
Unfortunately, the coffee market did not respond in a way that Livermore wanted. It remained dull for nine long months and it did not go up at all. His coffee contracts soon expired, and he reluctantly sold all of them with a great loss. Yet this did not change his view on coffee. He thought that, although the timing was wrong, his fundamental view was still sound. As soon as he closed out his position in coffee, he renewed his contracts again. This time he increased his bet by buying three times as much as he got nine months ago.
The timing was much better in his second try. Not long after he renewed his position, the coffee price started to go up. It would seem that the problem of cargo ships shortage had become more apparent to the merchants, and they also started to realise what was going to happen in the coffee market.
Livermore grew even more confident, because he couldn't see how he could lose. The underlying economic conditions were in his favour. He had waited a year and his prediction was finally starting to come true. Even though it was just the beginning, he could already sense victory and see the great profit he was going to obtain.
However, things did not turn out the way Livermore expected. He had expected everything correctly. He was correct about the effect of the German submarines on the number of available cargo ships. He was correct about those merchant who bought a lot of coffee in South America but could not bring it to the United States. He was correct about the inevitable result of the diminished coffee supply. He had unfortunately missed one thing: the intervention of the government.
During the First World War, the government of the United States had been enforcing policies to prevent profiteering in basic necessities, even though the country remained neutral at that time. One of the purposes was to prevent hyperinflation which would affect the lives of hundreds of millions of American civilians. Speculative attempts to corner the market and mark up the price of a commodity like coffee were definitely not encouraged.
Well, Livermore believed that the other side of his trade - some coffee merchants who have shorted coffee in the market - feared that they might have to take a huge loss if the coffee price rises, and they knew that it was Livermore who went heavily long in the market. They reported Livermore's activity to the Price Fixing Committee of the War Industries Board, and accused him of the intention of cornering the coffee market. As a result, the Price Fixing Committee set up a price ceiling in coffee (i.e. coffee could not be sold above a particular price), and also a time limit to close out all the existing contracts in the coffee exchange.
Of course, Livermore believed that the decision was unjust. Many other commodities were selling so much higher than the pre-war level, and the government did nothing about it. Coffee was still being sold below its pre-war level, and they decided to put a price ceiling there and closed down the coffee exchange. Moreover, the advance in price was not due to any speculative activities, but the invisible hand of demand and supply. Even if he held no coffee, other coffee merchants were bound to take his place and hedge against the rising price for themselves.
Nonetheless, after all was said and done, there was only one thing that Livermore could do, and that was to close out his position in coffee. The millions of profit that he had dreamed about for over a year remained a dream.
Even though Livermore seldom looked back at things that he could not change, he strongly felt that this coffee trade was one of his most disappointing experiences. He was so right and prepared so well, only to be defeated by a sudden change in regulation without warning. A speculator deals with probabilities instead of certainties. Sometimes, one may think that a trade has a ninety-nine percent chance to work, but he still has to believe that the remaining one percent chance of going wrong can still happen.
Reference:
Lefèvre, E. (1923). Reminiscences of a Stock Operator. New York: George H. Doran Company.
Reference:
Lefèvre, E. (1923). Reminiscences of a Stock Operator. New York: George H. Doran Company.
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