Popular Delusions

Sometimes the market surges in your favor, and sometimes…well, not so much. But for any investor trying to figure out which way the investment tide is going, Charles Mackay’s Popular Delusions is a must-read – or, as Addison Wiggin suggests, you could try to learn how to read the waves…

Late in afternoon yesterday, J. Christoph Amberger strolled into our offices on St. Paul Street in Baltimore, handing out fresh copies of his newly published book, Hot Trading Secrets.

“There will be a quiz,” he said in his usual clipped, Germanic tone. And tossed a copy in our direction.

Like any self-respecting author would do, we opened the book straight to the index and looked for the name Addison Wiggin. Sure enough, on page 268, Christoph writes, “Markets are reflections of human emotion and as such are immune to moralistic directives of history.” Christoph is a student of markets and as such is entitled to his observations, but we hadn’t expected to be used as an example of ‘moralistic directives.’

“Classic perceptions of value, and hence of bubble theories,” Mr. Amberger continues, “over the past two decades have developed a tendency to explain not how the market works, but how it ought to work.

Charles Mackay: Tulipmania

“This development is not new. Recent studies, such as Famous First Bubbles by Peter M. Gerber, are uncovering that much of what we believe to know about the Dutch ‘Tulipmania,’ for example, has been based on rather shaky assumptions that were fostered by moralist treatises whose general tenor we find in later key works such as Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds, and even in the 2003 NYTimes bestseller Financial Reckoning Day of my dear friend Bill Bonner and fellow St. John’s alumnus Addison Wiggin.”

Christoph is perhaps best known in our circles for a statement he made to a young recruit about 10 years ago. The would-be writer had made a grammatical error on an article he had submitted to Christoph’s flagship rag, Taipan. “Allow me to instruct you in your native tongue,” Christoph said. And the phrase stuck. I use it on occasion myself, despite my horrible rendering of a German accent.

Mr. Amberger is also known for the deep, enduring scars he reputedly received on his scalp during an initiation ceremony for a secret Germanic fraternity of sword enthusiasts. (He’s one of the world’s foremost experts on “historical European sword fighting traditions.) “Trading has its own set of risks,” Christoph maintains, “You can gain a lot, and you can lose a lot. It’s the nature of the game. Make sure you never risk more than you can afford to lose. Once you’ve covered your liabilities, shelter and basic income, set aside a fixed amount of money for trading. But most of all, don’t look at the market as a divine tool whose task it is to validate your world-views. It should be enough if they – and make possible – your market profits.”

Money is good. And it is the end that justifies the means, you might say. Fair enough.

We’re not sure what the impact of the swords had on Mr. Amberger’s long-term intellectual capacity, but we fail to see how history and “moralistic directives” impede his desire for market profits. In fact, quite the opposite might be said to be true. As publisher of Agora Financial, my own groups of analysts and traders have seen spectacular gains. For instance, here are some they’ve made in the last five days:

Emerging Capital Report: 15.6%, 7.2%
Capital & Crisis: 12.1%
Strategic Investment: 9.5%, 8.3%, 7.8%, 7.6%
Penny Stock Fortunes: 8.4%, 7.7%
Outstanding Investments: 8.3%, 7.0%

And Hulbert’s Financial Digest has rated our own Outstanding Investments as the #1 performing newsletter over the past five years, ahead of all newsletters in the industry.

But even that boisterous claims needs explanation. Outstanding Investments covers oil, gold, natural gas, natural resources, commodities and energy markets. Since the great Tech Wreck on Wall Street in 2000 all of these markets have been in a healthy bull market. We cannot take credit for the bull market, but we can cover it and make recommendations for how to play it for profits.

Charles MacKay: Knowing the Asset Class and History

And that might be where we get off the Amberger bus. We like a market gain as much as the next fella. But we don’t claim to be able to have a crystal ball. In fact, we have very little to go on when making investment recommendations other than an intimacy with the asset class being recommended…and history. We require our analysts to get down and dirty with the details of their areas of “expertise.” Justice Litle and Kevin Kerr, who contribute to Outstanding Investments and Resource Trader Alert respectively, are two of the best analysts in the business. Still, we are in a bull market…so the tides of the market are on our side.

The trick, if there is one, is to figure out how to read the waves…and determine which way the tide is going. Make a good guess. And recognize – in the end – that we probably still don’t know. Any attempt to do otherwise would be pure hubris. And deadly for all of us.

The best tool we have for understanding markets and where to place your bets is history. History has a way of “giving people what they deserve, not what they expect,” to quote my partner in crime in this Daily Reckoning project. But that doesn’t preclude Christoph’s “Dynamic Market Theory” or nullify it in anyway. The “moralistic directive” that Christoph sees in our work reflects trends in history, not something of our own design.

You may be following along as John Mauldin artificially dissects a new book by the research firm GaveKal and our own effort Empire of Debt. Mauldin has pitted GaveKal’s approach to the markets, and their determination that “this time it really is different” against your editors contention that people may make progress with respect to technology and improvements in every day life, but with respect to markets, economics and politics the same mistakes are made over and over again.

By fortune alone, we received this e-mail from a reader while scribbling away this morning:

“I have been following the debate over whether you or the gentlemen at GaveKal are right. In my opinion you all have valid points. I am a technical trader so for me the question is one of arriving at a positive expectation derived from probabilities based on the observance of similar circumstances in the historical data (price charts) and then managing risk.

“So let’s say if I were to try to arrive at a positive expectation on fiat currencies, the historical data shows the probability of success is zero; no positive expectation so no trade. It doesn’t mean that I am right or wrong it just means that with no positive expectation I am not willing to take the risk.

“And so this is my view of much of the world and its workings. If history shows little or no probability of success why repeat it? Doing so impedes progress, wastes time and resources, and usually leads to crisis. Just imagine where we would be if Edison kept repeating his experiments with the same variables that failed the first time.”

Charles MacKay: “Buy Low, Sell High”

Here we might paraphrase an observation the Austrian economist Friedrick Hayek made about bureaucrats and centralized economies. The economy, and by extension, the market is infinitely complex. Especially now with the globalization of financial markets, trillions of transactions happen every second. No one person can possibly have enough information at any one time to make an informed decision. And even if you did have a method for collecting all that information, by the time you acted on it…it would be obsolete, irrelevant.

So what do you do? You stick to the old chestnuts like “buy low, sell high.” How do you know what’s low? Well, you have little help in making that determination, except for what has happened in the past.

History also reveals that humans can be counted on to do the damnedest of things. In our “moralistic” tome Financial Reckoning Day we recount the tale of how cousin of the Duc D’Orleans committed murder on the rue Quimpacoix in the 1720 frenzy for shares in John Law’s Misssissippi Company. Yes, guilty as Christoph charged. We learned a great deal about what happened in those days from Charles MacKay’s Popular Delusions. But while doing the research for that project we also remember a penny stock scheme that made the papers involving tech stocks, the mob and a couple of unfortunate murders on the Jersey shore.

La plus ca change, plus c’est la meme chose. But that’s what makes The Daily Reckoning so much fun. We’re always being confronted by history, hubris and the belief that this time it really is different.

Addison Wiggin
The Daily Reckoning

December 13, 2005

P.S. Charles Mackay’s Popular Delusions is a must-read for any investor trying to understand which way the investment tides are flowing. We have recently discovered a Classic version of the book, bundled with two other must-reads: Confusion de Confusiones by Joseph de la Vega and The Art of Contrary Thinking. They are on offer from our good friends at Schaeffer’s Investment Research.

These three tomes are in-depth studies of crowd psychology and provide you with the first step in understanding market psychology. They’re inexpensive, indespensible and easy to read.

We pick up where we left off yesterday: in the middle of a street in Argentina. What we were doing in the middle of the street instead of in the notary’s office is a story in itself.

Like other countries, Argentina has laws against doing things simply and inexpensively. Foreigners need good advice. Otherwise, they’re almost sure to get into trouble. Fortunately, we hired one of the top lawyers in the country. He was taking us from the bank to the stock exchange so we could sign papers to get money where it was supposed to go. The whole transaction took hours, and almost cost the seller his life. And then, when the cash finally ended up in the right hands, another problem presented itself. What were they to do with it? By then, the banks were closed.

“We can’t walk around with that kind of money in our pants’ pockets,” said Señor Rodriguez.

“What do you care?” answered Luis. “It’s a bank draft. If someone steals it, we’ll give you another one.”


The whole extended Rodriguez family had come to Buenos Aires for the occasion. The ranch had been in the family for more than half a century.

“I remember when I bought the place,” said the old man who had bought the place, Señor Rodriguez’s father. “There wasn’t even a road. You had to go up there on horses. But now there’s a nice dirt road. You can drive into town; it only takes a couple of hours. People have gotten so soft. They can’t believe how hard it was in my day.”

“Be quiet, Papa. We’re doing something serious now,” said one of his daughters.

“Well, this is serious. I’m telling this young man (we looked around, wondering whom he was talking about) what it was like up there. He might change his mind. You know, it’s very high and very cold. We always had cattle in the upper valley. In the winter, we would ride up and drive them down to one of the lower valleys, but there’s a little river and even though it was frozen solid, they don’t like to cross. So, we had to throw dirt on it to get them across. It’s hard up there.”

“Well, that’s just it, Papa. We don’t want him to change his mind.”

By this time, your editor’s instruction in Spanish was stretched to the breaking point. He had been informed about Spanish verbs in subjunctive mood, but he was never quite sure when one turned up. Nor was he sure that many of the words he was hearing were actually Spanish at all. Many sounded like gibberish.

“Ah, you know…they don’t really speak Spanish,” explained our lawyer. “Well, of course it is Spanish, but it is definitely not Castilian Spanish. It’s not exactly the language you’re learning in London. It’s Argentine Spanish, and these people have a strong accent from the northwest. I’m surprised you understand any of it.”

We probably imagined more than we understood. Still, the conversations that we imagined we had were interesting. The people we met, who will be our new neighbors (only two hours away!), were “muy simpatico.” And when the signing ceremony was finally completed, the men hugged your editor firmly, the women kissed him, and then, the family went out the door.

We could hear them laughing as they went down the elevator.

More news, from our team at The Rude Awakening…


Dan Denning, reporting from Melbourne, Australia:

“When Allied soldiers charged the beaches of Normandy on June 6, 1944, victory seemed very uncertain and, at best, very distant. Nine months later, the Allies crossed the Rhine into Germany. Gold’s recent charge through $500 an ounce will lead to a similarly decisive and shocking victory in the monetary realm.”


Bill Bonner, with more views from Buenos Aires…

*** A new A.T. Kearney study reports that 54 percent of executives say they are planning to increase foreign investment spending this year. That’s the largest number since 2000. “Global executives are more eager to commit FDI in China, India and Eastern Europe than at any time since 1998,” says the report.

No one is making out better than our friends in the Far East. China and India are increasingly seen as sources of innovation and attractive research and development locations, according to the study.

For the fourth year running, China is the most preferred FDI location world wide, and for the first time, India became the second most likely FDI destination, pushing the United States back to third. Soon, India may leap ahead of China for that coveted number one spot.

“Things could just keep getting better for India,” our resident India expert, Sala Kannan says. And Sala should know. She has been researching what she calls “India’s $200 Billion Secret” for the past year. This secret, once it’s revealed will cause thousands of jobs to be created. Billions in new taxes will pour into India. Billions more will trickle down into India’s health care, auto and infrastructure sectors.

Sala tells us that early investors – who are invested in the companies likely to see these new profits – could walk away with several times their money.

*** We are quite the record-breakers, dear reader…last month, the U.S. budget deficit increased 43 percent, to $83.1 billion – the largest November deficit on record.

As we pointed out yesterday, the American Debt Clock is ticking – totaling over $26,000 per citizen. Good thing no one is actually paying that debt back – today, FOMC announced that they raised the benchmark federal funds target rate by a quarter-percentage point…and those with consumer, business or the dreaded ARM loans are going to be facing higher interest rates.

The rate hike comes as no surprise to anyone, and the committee signaled further rate hikes in months to come to keep inflationary pressures at bay.

According to the Fed, inflation is the biggest threat to the America’s economic outlook, since the economy “has essentially shrugged off the impact of the hurricanes.”

Hmmm…following Hurricane Katrina, the U.S. House of Representatives passed four tax-cutting bills, which eliminated $94.5 billion in revenue from the federal budget. The total cost of rebuilding in the Gulf exceeds twice the total spending cuts approved last month.

“Of course, voters like it when politicians cut taxes,” says Addison. “But from a financial standpoint, it’s pointless if you’re increasing spending at the same time.”