Review - “Extraordinary Popular Delusions and The Madness of Crowds” by Charles MacKay

137
Sun, Nov 3, 2013 - 12:06pm

I have a necessary library of trading and market related books, both in printed and electronic form. To do things I believe that you need to allocate resources. For investing, one resource is, obviously, money or capital to invest or trade with.

Other things can be equated with money, for they have difficulty in the getting. Power is one – it can be used to seize money from those who have it. Another is knowledge, for with knowledge money can be made or created. A third primary resource is time. It takes time for all things to happen, time to gain power, even a HFT algorithm requires a small amount of time to carry out it’s instructions, and it takes time to learn knowledge.

I’m talking of knowledge today. This is the first of a series of book reviews which more or less could be called my own Recommended Reading List for Traders and Investors. It’s personal and some famous works will be left out, and I assume some minor works will come as surprises, as the prioritization is my own and based on my personal experiences and thoughts.

I had an inner debate about whether the #1 slot should go to MacKay or Lefevre/Livermore, but MacKay wins out because his work transcends trading, or even markets. It is a study of humanity. I expect everyone would benefit to a certain degree from reading this.

Oh, I should mention – Charles MacKay wrote it in 1841. That’s 172 years ago, 50 years after the French revolution, and 20 years before the American Civil War was to be fought.

I add at this point that I have three volumes of this book in my personal collection: A 1980 facsimile of the original, 724 pages in length, an electronic one, and also a new compact (abridged) hardback edition from Harriman House of 2003, 115 pages, and reprinted several times since. So this is an investment classic and still in very high demand, hence the reprints. The main difference between my two paper editions, apart from weight, is that the recent compact volume contains the financial bubbles whereas the original full text describes these however it also recounts other historical manias not related to finance like Fortune-Telling, Duelling, Haunted House, Poisoning and other manias.

I’ll stay with the compact volume for this review seeing as it will be read by investors and traders in the main. The illustrations are representative of my quirky thought process and not intended to be manipulative or imposing a political view. They are merely chosen to transcend the time of writing of the excerpted texts visually.

So what book written back then could be so pertinent today? I must get out of the way and let Charles MacKay's words speak for themselves. Here are some quotes from the first section about John Law and the Mississippi Bubble. You can judge for yourself.

Early on his wisdom was noticed and discussed in the media:

All the small poets and litterateurs of the day poured floods of adulation upon him. According to them, he was the saviour of the country, the tutelary divinity of France; wit was in all his words, goodness in all his looks, and wisdom in all his actions.”

Real assets were sucked in while paper was issued to acquire these items of value:

... It was remarked at this time that Paris had never before been so full of objects of elegance and luxury. Statues, pictures, and tapestries were imported in great quantities from foreign countries, and found a ready market.

All those pretty trifles in the way of furniture and ornament which the French excel in manufacturing were no longer the exclusive playthings of the aristocracy, but were to be found in abundance in the houses of traders and the middle classes in general. Jewellery of the most costly description was brought to Paris as the most favourable mart;”...

The wealth effect is described so well, as is the link between the Sovereign Ruler and Financier:

“...Thus the system continued to flourish till the commencement of the year 1720. The warnings of the parliament, that too great a creation of paper money would, sooner or later, bring the country to bankruptcy, were disregarded. The regent, who knew nothing whatever of the philosophy of finance, thought that a system which had produced such good effects could never be carried to excess. If five hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage. This was the grand error of the regent, and which Law did not attempt to dispel. The extraordinary avidity of the people kept up the delusion; and the higher the price of Indian and Mississippi stock, the more billets de banque were issued to keep pace with it.

On astute individuals hedging to protect against the inflationary loss this next quote reads like it was written both next year and in the 1930s, some 92 years after Mackay published his book:

“ ... In February 1720 an edict was published,

which, instead of restoring the credit of the paper, as was intended, destroyed it irrecoverably, and drove the country to the very brink of revolution. By this famous edict it was forbidden to any person whatever to have more than five hundred livres (20l.) of coin in his possession, under pain of a heavy fine, and confiscation of the sums found. It was also forbidden to buy up jewellery, plate, and precious stones, and informers were encouraged to make search for offenders, by the promise of one-half the amount they might discover. The whole country sent up a cry of distress at this unheard-of tyranny. The most odious persecution daily took place. The privacy of families was violated by the intrusion of informers and their agents. The most virtuous and honest were denounced for the crime of having been seen with”

And that is just the section about John Law!

I do not wish to spoil with excessive quotation, only two more, but the sections about the South-Sea Bubble and the Tulipomania are just as archaic distant history, and at the same time they describe exactly what is going on around us today in our Central Bank- Politician-Banking controlled present day world.

So to finish this review, I excerpt two short and memorable pieces – first from Charles Mackay’s 1st 1841 edition and another from his preface to the edition of 1852, written 160 years ago: “... millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple; and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity.” .....

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

And that last passage, Dear Reader, is as up to date as they come. If there is a"required reading list" for investors and traders, this text which has endured nearly two hundred years and still remains so appropriate to modern life's financial intrigues surely deserves the number one position on that list.

Resources:

Publishers' Page for this book: https://www.harriman-house.com/book/view/556/investing/charles-mackay/extraordinary-popular-delusions-and-the-madness-of-crowds/

Available in printed, and electronic versions

Argentus Maximus

.

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author can be found here: RhythmNPrice.

About the Author

  137 Comments

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Spartacus Rex
Nov 3, 2013 - 8:15pm

Dammit Bollocks, This Is A "No Fly" Zone...

and there are flies all over you. LOL

@ DPH

Submitted by Spartacus Rex on November 1, 2013 - 2:38 am.

i.e. "The beginning of a new life of living is not afraid"

Ojibwemowin
Nov 3, 2013 - 8:13pm

KCAP

I don't know if I should laugh or cry. I am trying to just keep my eyes open. I have to admit this guy is good and has been very successful up to now....not saying he always will be, but then again I would have a hard time betting against him.

It has been an interesting juxtaposition, as in two seeming contradictory world views standing in contrast so close to me.

Bollocks
Nov 3, 2013 - 8:09pm

Yes Mr Fix

I agree, much out of character for DPH.

His latest avatar is really dark. And you're right, he's not said anything, other than log-in and change his name and avatar - more than once, as you've pointed out.

Hope he's ok.

Mr. Fix
Nov 3, 2013 - 7:59pm

Bollocks

You are right, that is today's version, I had run it also, but then I went back and check a post from last week,

(It was a post I made commenting on his new screen name)

and that is what I got, not reading Arabic, I was unaware that it had actually changed.

I also ran the Chinese version that he had up for a day.

They're all different,

and he has had three different avatars,

and he has not made any posts for a couple of weeks.

I noticed he was logged on tonight, but didn't say anything.

More than a bit out of character don't you think?

And, his hat tip account has been frozen for days.

Dyna mo hum
Nov 3, 2013 - 7:57pm
Bollocks
Nov 3, 2013 - 7:47pm

Mr Fix - re DPH

I did that too, a couple of days ago, and it detected it as arabic, with the translation as

"He scared the beginning"

DeaconBenjamin
Nov 3, 2013 - 7:43pm

Extraordinary Popular Delusions

Bought a used copy online on October 28. Hope I get the full version. I've been hearing about this book for 30 years.

This was the grand error of the regent, and which Law did not attempt to dispel.

This is one interpretation of the facts, but not the only one. If Law did fight the Regent on this point, the Regent still wins. Law could convince the Regent, but could hardly force him to do anything.

By this famous edict it was forbidden to any person whatever to have more than five hundred livres (20l.) of coin in his possession.

Regarding 500 livres -- the reference to 20l. was to 20 British sovereigns (libra/pounds), nearly five gold ounces or 100 British crowns; somewhat more than 84 silver ounces.

Dyna mo hum
Nov 3, 2013 - 7:39pm

DPH

Don't tell me he has joined up with the X MEN

Mr. Fix
Nov 3, 2013 - 7:35pm

Just for the fun of it,

I ran DPH's new screen name through Google translate, and this is what I got:

The beginning of a new life is living X.

I wonder what he's up to?

AlienEyesTF
Nov 3, 2013 - 7:31pm

Good point, Turd..

When you feel like almost everybody is out to get you and almost everybody is out to get you, it ain't paranoia. It's righteous caution that's been bought and paid for.

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