Le Bon's bonbons (2)

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We will pick up where we left off with Dr. Le Bon in the last blog.  He went on in his book, The Crowd, to explain the characteristics of people caught up in a psychological crowd as follows:

If the individuals of a crowd confined themselves to putting in common the ordinary qualities of which each of them has his share, there would merely result the striking of an average, and not, as we have said is actually the case, the creation of new characteristics.  How is it that these new characteristics are created?  This is what we are now to investigate.

The first is that the individual forming part of a crowd acquires, solely from numerical considerations, a sentiment of invincible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint.  He will be the less disposed to check himself from the consideration that, a crowd being anonymous, and in consequence irresponsible, the sentiment of responsibility which always controls individuals disappears entirely.

The second cause, which is contagion, also intervenes to determine the manifestation in crowds of their special characteristics, and at the same time the trend they are to take.  In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest.  This is an aptitude very contrary to his nature, and of which a man is scarcely capable, except when he makes part of a crowd.

A third cause, and by far the most important, determines in the individuals of a crowd special characteristics which are quite contrary at times to those presented by the isolated individual.  I allude to that suggestibility of which, moreover, the contagion mentioned above is neither more nor less than an effect.  The most careful observations seem to prove that an individual immerged for some length of time in a crowd in action soon finds himself – either in consequence of the magnetic influence given out by the crowd, or from some other cause of which we are ignorant – in a special state, which much resembles the state of fascination in which the hynotised individual finds himself in the hands of the hypnotizer.

In his case, as in the case of the hypnotized subject, at the same time that certain faculties are destroyed, others may be brought to a high degree of exaltation.  Under the influence of a suggestion, he will undertake the accomplishment of certain acts with irresistible impetuosity.  This impetuosity is the more irresistible, as in the case of crowds, than in the case of the hypnotized subject, from the fact that, the suggestion being the same for all the individuals in the crowd, it gains in strength by reciprocity.

An individual in a crowd is a grain of sand amid other grains of sand, which the wind stirs up at will.

Well, that sounds like a lot of fun!  It would appear that any of us might succumb to the lure and force of crowd psychology, depending on what the vision may be; social reform, political change, religious beliefs or what have you.  The same forces can be brought to bear, on a more subliminal level, in financial markets.  It pays to recognize those forces and, more importantly, to resist them.

For long periods, the stock market can be steady and tame.  It may go up and down on a daily, weekly, monthly or yearly basis with a gentle overall trend up or down, but without the gut wrenching moves that catch the attention of investors.  During those times, all seems stable.  There is always the potential, however, for the crowd to take over and move things far and fast with breathtaking force.  Remember, the crowd can be either euphoric and manic, sending the markets skyrocketing to heights never before reached or despondent and depressed, sending the markets plummeting to depths not seen in decades.

How, you ask, can all of this be avoided by the individual investor?  We’ll start working on that in the next post.

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The Crowd, A Study of the Popular Mind by Gustave Le Bon (1895) is published by Dover Publications, Inc.

Le Bon's bonbons (1)

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

Sometimes, if you have enjoyed a book, you will find that it is worth your time to look at another book or author suggested by the author of the book you read.  In the last post we learned a little about crowds in The Money Game by Adam Smith.  He quoted from Gustave Le Bon’s 1895 book, The Crowd.  Remarkably, this small book from 115 years ago is still available in print. Some of its references are dated, including comments on what would have been, for Dr. Le Bon, relatively recent events such as the wars conducted by Napoleon and events during the French Revolution.  Nevertheless, Le Bon’s observations on the way crowds come together, their composition and behaviors are as pertinent today as they were at the end of the 19^th century.  He described a crowd as follows:

In its ordinary sense the word “crowd” means a gathering of individuals of whatever nationality, profession, or sex, and whatever be the chances that have brought them together.  From the psychological point of view, the expression “crowd” assumes quite a different signification.  The gathering has thus become what, in the absence of a better expression, I will call an organized crowd, or, if the term is considered preferable, a psychological crowd.  It forms a single being, and is subjected to the law of the mental unity of crowds.

The disappearance of conscious personality and the turning of feelings and thoughts in a definite direction, which are the primary characteristics of a crowd about to become organized, do not always involve the simultaneous presence of a number of individuals on one spot  Thousands of isolated individuals may acquire at certain moments, and under the influence of certain violent emotions – such, for example, as a great national event – the characteristics of a psychological crowd.  The psychological crowd is a provisional being formed of heterogeneous elements, which for a moment are combined, exactly as the cells which constitute a living body form by their reunion a new being which displays characteristics very different from those possessed by each of the cells singly.  What really takes place is a combination followed by the creation of new characteristics, just as in chemistry certain elements, when brought into contact – bases and acids for example – combine to form a new body possessing properties quite different from those of the bodies that served to form it.

It is easy to prove how much the individual forming part of a crowd differs from the isolated individual, but it is less easy to discover the causes of this difference.  To obtain at any rate a glimpse of them it is necessary in the first place to call to mind the truth established by modern psychology, that unconscious phenomena play an altogether preponderating part not only in organic life, but also in the operations of the intelligence.  The conscious life of the mind is of small importance in comparison with its unconscious life.

It is more especially with respect to those unconscious elements which constitute the genius of a race that all the individuals belonging to it resemble each other, while it is principally in respect to the conscious elements of their character – the fruit of education, and yet more of exceptional hereditary conditions – that they differ from each other.  Men the most unlike in the matter of their intelligence possess instincts, passions, and feelings that are very similar.  From the intellectual point of view an abyss may exist between a great mathematician and his bookmaker, but from the point of view of character the difference is most often slight or non-existent.

It is precisely these general qualities of character, governed by forces of which we are unconscious, and possessed by the majority of the normal individuals of a race in much the same degree – it is precisely these qualities, I say, that in crowds become common property.  In the collective mind the intellectual aptitudes of the individuals, and in consequence their individuality, are weakened.  The heterogeneous is swamped by the homogeneous, and the unconscious qualities obtain the upper hand.

All of that seems quite interesting, but, you ask, does it really apply to today’s investors and markets?  With regards to Le Bon’s book, our friend, Adam Smith in The Money Game, answered as follows:

Is all this really relevant?  Remember, we have here a field – securities and their price movements – which is avidly studied by eleven thousand rational security analysts, any number of fervent students and graduate students, and a whole slew of computers.  One hundred thousand rational brokers – registered representatives, as they are called – dispense information to twenty-four million investors.  The whole process is rife with statistics, tables, mathematics and dazzling reasoning.

I guess his answer would be yes.  The number of people interested in securities and their price movements is much larger today than when Mr. Smith wrote those words.  Dr. Le Bon’s crowd of 1895 can still teach us something today.  Given Le Bon’s description of a crowd so far, can you think of one formed in the last year or so?  If you are American, can you say Tea Party?

We will learn just a little more from Doctor Le Bon in the next post.

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The Crowd, A Study of the Popular Mind by Gustave Le Bon (1895) is published by Dover Publications, Inc.  The excerpts from The Money Game

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.

Also, here is a tip on leaving Comments on this blog.  The easiest way to leave a comment without having to go through all the steps of signing in with the site is to leave your comment and then pick the "Anonymous" profile.  If you want, please add your name at the end of your comment and it will be posted within 24 hours after you leave it.

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

Flowers Through The Centuries

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

In the last post, I said that the books we will learn about would provide information on three areas of major importance to an investor: the action of markets, investor psychology and methods of investing.  Let’s start with markets behaving badly.  In 1841 Charles Mackay wrote his classic, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.  In addition to discussions of crusades, witch burnings and other forms of crowd madness, he described three instances of financial madness: the Mississippi Scheme, the South Sea Bubble and the tulip trade in Holland.  Since the tulip bubble in approximately 1636 is most often cited in popular literature as the poster child for a market gone mad or, more accurately, people gone mad in a market, I have chosen excerpts from the chapter on tulips to share with you.  As you chuckle over the antics of the normally sober Dutch back then, substitute “internet companies” for “tulips”.  If you tracked the wild markets at the close of the 20^th century, you will see that the only difference between the two periods was a separation of 400+ years.  The behavior of the people is remarkably similar, as were the ultimately damaging results.  Here are excerpts from Mr. Mackay’s work:

THE TULIPOMANIA

Quis furor, o cives!--Lucan

The tulip-so named, it is said, from a Turkish word, signifying a turban-was introduced into western Europe about the middle of the sixteenth century.  Conrad Gesner, who claims the merit of having brought it into repute,-little dreaming of the commotion it was shortly afterwards to make in the world,-says that he first saw it in the year 1559, in a garden at Augsburg, belonging to the learned Counsellor Herwart, a man very famous in his day for his collection of rare exotics.  In the course of ten or eleven years after this period, tulips were much sought after by the wealthy, especially in Holland and Germany.  The rage for possessing them soon caught the middle classes of society, and the merchants and shopkeepers, even of moderate means, began to vie with each other in the rarity of these flowers and the preposterous prices they paid for them.

The demand for tulips of a rare species increased so much in the year 1636, that regular marts for their sale were established on the Stock exchange of Amerstdam, in Rotterdam, harlaem, Leyden, Alkmar, Hoorn and other towns.  Symptoms of gambling now became, for the first time, apparent.  the stock-jobbers, ever on the alert for a new speculation, dealt largely in tulips, making use of all means they so well knew how to employ to cause fluctuations in prices.  At first, as in all these gambling manias, confidence was at its height, and every body gained.  Many individuals grew suddenly rich.  A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot.  Everyone imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.  Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps and old clotheswomen dabbled in tulips.  People of all grades converted their property into cash, and invested it in flowers.  Foreigners became smitten with the same frenzy, and the money poured into Holland from all directions.

At last,  however, the more prudent began to see that this folly could not last for ever.  Rich people no longer bought the flowers to keep them in their gardens, but to sell them again at cent per cent profit.  It was seen that somebody must lose fearfully in the end.  As this conviction spread, prices fell, and never rose again.  Confidence was destroyed, and a universal panic seized upon the dealers.  Hundreds who, a few months previously, had  begun to doubt that there was such a thing as poverty in the land suddenly found themselves the possessors of a few bulbs, which nobody would buy, even though they offered them at one quarter of the sums they had paid for them.  Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity.  Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.

Mackay's entire well written classic describing numerous instances of crowds gone wild is available through several publishers.  John Wiley & Co., in its Wiley Investment Classics series, publishes “Extraordinary Popular Delusions and the Madness of Crowds & Confusión de Confusiones”  which contains not only the three financial events reported by Mr. Mackay in 1841 and but also Confusión de Confusiones by Joseph de la Vega, who wrote about market manipulation in 1680.

Welcome to WallStreetSmarts

This is a blog about the best books on investing for individual investors.   Some of the books we will be exploring are:  The Art of Speculation by Philip Carret, The Nature of Risk, Stock Market Survival and the Meaning of Life, by Justin Mamis, How to Buy Stocks by Louis Engel, The Intelligent Investor by Benjamin Graham, The Money Game by Adam Smith, Common Stocks and Uncommon Profits by Philip Fisher, A Random Walk Down Wall Street by Burton Malkiel, Warren Buffett’s Letters to Berkshire Hathaway shareholders and many others.  With the help of these books, regardless of your age, gender, race, education or annual income, you can learn to invest your hard earned money and save the fees and costs that would otherwise reduce your investment returns in the stock market over time.

Those folks selling mutual funds justify their fees and charges by saying, "It's only 1% a year."  That is true, but if you pay that seemingly small percentage every year over, say, a 30 year period, it sounds to me like you may have ultimately paid a cumulative 30% of your initial investment to have someone else do what you can do yourself.  The fund operators are entitled to compensation, but there is a way to keep those dollars for you.  You will learn from these books that it is not that hard to match, if not beat, average market returns, something a significant percentage of mutual funds fail to do each year.

If you have the time and desire, you can learn what the Wall Street folks know (or claim to know) and save those dollars for yourself.  The books you will learn about will help you invest with lower costs and fees.  In effect, by investing on your own, you “earn” that extra money which would otherwise go into someone else’s pocket.

Your time is valuable, so you will not be burdened with page after page of material.  Rather, the posts will include short excerpts from the books and my commentary.  If longer passages from a book are appropriate, they will be broken into blog size amounts over more than one post. 

If you enjoy sections from a featured book, you can click the Amazon button on this site and order it.  The small compensation paid by Amazon will help to defray the expenses for hosting of the blog site and reprint permission fees for some of the books.  The amount paid to the site does not increase the amount you would pay for the book if you went to Amazon directly.

New material will be posted on Mondays every week so please check back.  There are three areas an individual investor needs to know about in order to succeed in the market.  The books will provide you with information about investor psychology (learning about your inner investor), the way markets function (in the past and today) and how to formulate a method of investing that will work for you (it is different for each individual).  We will learn from books covering all three areas in upcoming blogs.