Monday, November 15, 2010

Hangin' With The Wrong Crowd

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

When someone mentions an “investment book”, many folks immediately picture a dull, incomprehensible tome with deadening prose accompanied by lots of mathematical formulas, charts and graphs.  Such is not always the case, especially when the book is The Money Game by Adam Smith.  The name Adam Smith is a pseudonym for George J.W. Goodman, who is an award winning financial author.  The Money Game, one of several books he has written on the stock market, provides an entertaining  insider’s look at Wall Street and the antics of the  folks who populate it.  He likens the millions of investors in the stock market to a crowd.  To support his proposition, he calls upon Mr. Mackay and Gustave Le Bon, a French writer who studied the phenomenon of crowds in 1895.  This is what Adam Smith had to say in The Money Game about Mr. Mackay and Mr. Le Bon:

In 1841 David (Charles) Mackay published what is supposed to be the first good book on crowds, Extraordinary Popular Delusions and the Madness of Crowds.  Mr. Mackay’s book, said Mr. Bernard M. Baruch, helped him make his fortune and one Wall Street investment house sends the book out as a Christmas present.  If any of its clients read the book, they probably felt superior, because those Dutchmen who kept bidding the prices of tulips higher and higher a couple of centuries ago now seem sort of silly.  Unfortunately, it is quite possible to read about Dutchmen thinking that the world has an infinite hunger for tulips, and then to go right out and buy some snazzy computer stock because the world has an infinite hunger for computers.  There must always be a rationale, and if the computer rationale is easier than the tulip rationale, it may just be that we do not know the whole story on tulips.

At the end of the nineteenth century, a French physician called Gustave Le Bon published his Psychologie des Foules, translated as The Crowd.  To Le Bon, a crowd was not merely a number of people assembled in one place; it could be thousands of isolated individuals.  These he called a psychological crowd, subject to “the disappearance of conscious personality and the turning of feelings and thoughts in a different direction.”  According to Le Bon, the sentiments and ideas of all persons in a gathering take one and the same direction, and their conscious personality vanishes.  A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics.  The gathering has then become a psychological crowd.  In such situations, the actions of the individuals may be quite different from those the same individuals would consider when alone.  One of the most striking features of the crowd to Le Bon was its great difficulty in separating the imagined from the real.  “A crowd thinks in images, and the image itself calls up a series of other images, having no logical connection with the first…a crowd scarcely distinguishes between the subjective and the objective.”

Le Bon was an astute, if not particularly sympathetic, observer of crowds, and his description of crowd behavior is strikingly applicable to what we can readily discover taking place in financial markets.  Certainly all the elements are present: numbers of people, intense excitement and that essential simple image.  Indeed, few images are more simple and yet as beguiling as instant wealth.  Each such image carries the crowd far into the realm of fantasy, and sometimes beyond the boundaries of sanity.  Despite the assumption of the rationality and omniscience of investors claimed by our academic friends, the last word on the subject often seems to be the roar of the crowd.

Plainly, Le Bon did not think of a crowd as something one should spend one’s time in; an individual, he wrote, upon becoming a member of a crowd, “descends several rungs in the order of civilization” because the mind of the crowd is not an average but a new common denominator, mindless in the sense that it has surrendered to its own unconscious impulses.

I was very fortunate in so far as The Money Game was one of the first books I read about Wall Street and investing.  Its insightful and often humorous stories about investors, both individual and professional, whetted my appetite for more knowledge of a subject which could have been presented in a painfully dull manner.  The book is about as far from a text book on investing as you can get; but nevertheless just as educational in its own way.

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The excerpts from The Money Game by Adam Smith, copyright © 1967, 1968 by Adam Smith are used by permission of Random House, Inc.

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