Time Magazine called him the “most fabulous living U.S. stock trader.” He was also known as the “Boy Plunger” and the “Great Bear of Wall Street.” Unfairly blamed and vilified for causing the both the 1907 and 1929 stock market crashes, Jesse Livermore also was (and continues to be) held in high esteem by countless investors.

#-ad_banner-#He owned incredible mansions and all the trappings of vast wealth of the early 20th century. Far from being a loner or hermit, he married several beautiful, socially connected women and traveled in the same circles as the rich and famous of his era.

However, his life was far from being all wine and roses. This master investor swung between great personal highs and soul-crushing lows. Despite making and losing several multi-million-dollar fortunes over his lifetime (including earning a reported $100 million by shorting the market meltdown of 1929), his lifelong battle with depression ended in 1940 with his suicide at a New York hotel.

Fortunately, he left behind many investing rules and stock-picking techniques that still make perfect sense despite the radical market changes that have occurred since he plied his trade. Furthermore, during his life, Livermore emphasized that his losses in the market were the result of his failure to follow his own rules.

	Wikipedia
	Livermore has left behind many investing rules and stock-picking techniques that still make perfect sense today.

Livermore’s Investing Lessons
One of my favorite Livermore investing techniques is his rule of sending out “probes” into the market. Even if he thought a stock was perfect, he would still only purchase a small number of shares at first. Only after the trend was proved by these probes would he follow up with a full investment.

Along these same lines of reasoning, Livermore would also scale into a position as it went his way in profits. This means he increased his position size with winning investments. Many investors do the opposite, adding to a position as it moves against them. Livermore warned against this “averaging down,” going so far as to say that it’s how a gambler operates, not a true stock market speculator.

A ‘Livermore’s Rules’ Screen
Many attempts have been made to build Livermore’s numerous investing rules into a real-time investing strategy or market screener. Most notably, Martin Zweig — who was profoundly influenced by Livermore and is famous for predicting the market crash of 1987 — designed a screening system based on Livermore’s many rules. Here are three top investing picks from this “Livermore’s Rules” stock screen.

Enstar Group (Nasdaq: ESGR )

A Bermuda-based insurance business, Enstar acquires and manages insurance and reinsurance companies in run off. First-quarter net earnings came in at nearly $30 million, crushing the $12 million from the same quarter last year. Livermore was a huge proponent on buying strength. One of his favorite maxims was to never sell a stock because it seems high-priced. Enstar fits this criterion and other Livermore rules very well.​

Apple (Nasdaq: AAPL )

There is no question that Livermore would have loved Apple. Not only is it a leader in its field, it is among the most successful companies on Earth. Several fundamental catalysts are occurring that should continue to push Apple shares higher. First, an iPhone upgrade cycle later this year is expected to boost sales dramatically.   Second, the recent deal with Beats Electronics will open up fresh new markets for the company. What many investors don’t realize is that Beats is far more than just a trendy line of headphones — the company also offers a streaming music service that has over 250,000 subscribers. While this may not seem like many compared with the biggest names in music streaming, Beats offers a unique curated approach: It compiles playlists to match a listener’s tastes. Apple is excited about the potential of combining this ability with its iTunes base of music lovers. Remember, Apple has over 800 million iTunes accounts and has sold more than 35 billion songs — but there is no doubt that many of these users are hungry for something new. The Beats acquisition fits this bill perfectly.    Apple’s share price has been pushing higher on the long term weekly chart since building a double bottom since April in the $375 area. Livermore’s rule of buying strength would have likely triggered his buy orders when price snapped the 50-week moving average in the $500 range.

Spectra Energy Partners (NYSE: SEP )

A Houston-based natural gas pipeline company, Spectra is one of the largest fee-based master limited partnerships (MLPs). The U.S. fracking boom (and the resulting volumes of natural gas needing to be transported) has greatly helped this company grow. Livermore would have liked this booming growth of this market-leading MLP. Waiting for a breakout above $54 makes solid investing sense.​

On a side note, of the 89 stocks that the screener identified, only nine were domestic names. The 80 additional are traded on international exchanges. What this tells me is that if Livermore were alive today, he likely would be moving into international stocks.

Risks to Consider: No matter how successful a stock picker is, not every stock pick will be successful, so always use discretion when entering positions. Livermore’s rule of never allowing a loss to exceed 10% of your committed capital is crucial in this respect. In addition, never average down with losing positions.

Action to Take –> Implementing Livermore’s rule of sending out market probes as small positions before taking a full position makes good sense for every investor, especially with these three stocks. In addition, I recommend studying Livermore’s life and investing techniques.

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