The Immovable Trains

It was the year of 1922 when one of the greatest railway strikes in the United States swept across the country. The American economy was haunted by a sharp deflation as well as an oversupply of workforce, because of the return of surviving soldiers from the First World War. In the face of a horrible economy, the government approved successive wage cuts that enraged many workers. After a failed attempt of negotiation by the National Civic Union in late 1921, the tension between the workers and the employers escalated to an uncontrollable level.

On 1st July, 1922, the workers of several American railways launched a coordinated strike, with over four hundred thousand workers walked off their job. As the employers refused to give in, the strikers became increasingly violent and resorted to brutal tactics. In one case, a train was switched into a side track and ravaged by a mob. In some other cases, sections of the rail were intentionally blown up by explosives. When the strike finally ended in August, much of the American railway system was sabotaged, and the country’s ability of moving freights was greatly impaired.

The famous speculator Jesse Livermore smelled a great opportunity to make some money in the market (Lefèvre, 1923). The market that got his attention this time was wheat. For those who are not familiar with agriculture, wheat crop in the United States is divided into winter wheat and spring wheat. In simple terms, winter wheat is usually planted in autumn and harvested in summer next year, whereas spring wheat is usually planted in spring and harvested before winter in the same year. In other words, there are usually two rounds of delivery of wheats: one in summer, another one in late autumn.

Livermore happened to read the government report and learned that the harvest of the 1921 winter wheat was good, but that of the 1922 spring wheat was even better. He knew that the delivery of the 1921 winter wheat was delayed by the great strike in summer, and by the time the railway resumed service, the 1922 spring wheat would be ready for delivery as well. In other words, when the trains ran again, the wheat market would be overwhelmed with a very large supply.

It was thus a very logical conclusion that the wheat price would soon nosedive as soon as the delivery took place. As Livermore said, "Between being bearish and selling there is no need to waste time." He immediately sold his first quarter million bushels in the wheat market.

It was Livermore’s habit to watch the reaction of the market after he made his move. His first order of selling a quarter million bushels was filled quite comfortably without a large drop in price. This was not what Livermore wanted to see, because in a weak market where no one wants to buy wheat, it should be much harder to find buyers to take the wheats he sold. Therefore, he could not tell from the reaction whether the wheat market had any support at all.

Still convinced by his judgement, he sold a second quarter million bushels of wheat, and observed the market again. This time he got the kind of reaction he wanted: the market took a much longer time to buy all the wheat he sold, and the price dropped further than it did after the first selling. This was a good sign because it showed that no one was supporting the wheat market.

Delighted by this approving signal, Livermore only knew one thing to do: sell even more! He promptly increased his bet and sold an additional two million bushels, and the price declined much further. Within a few days, the wheat price continued to plunge, and Livermore could not help but to sell yet another two million bushels. The price broke badly and did not stop diving lower despite some temporary rallies. In the end, Livermore made a killing in it.

No one ever gave Livermore any tip to sell wheat, nor did he get any mysterious hunch to go short in that particular market. It was all due to his diligent study of the market conditions, as well as his logical mind to make decisions based on facts instead of rumours. Critical thinking is a very important ingredient in the recipe of speculative success, or in Livermore’s own words:

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer... What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think... The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.”

Reference: Lefèvre, E. (1923). Reminiscences of a Stock Operator. New York: George H. Doran Company.