Investment Classics - Extraordinary Popular Delusions and the Madness of Crowds

Whenever I see a guru or mentor promising they found the secret of market movement I think of this book. If you ever want to read a book that smashes the theory that human behaviour can be predicted, you should read Charles Mackay’s investment classic Extraordinary Popular Delusions and the Madness of Crowds.

Mackay's classic first published in 1841, shows that the madness and confusion of crowds knows no limits, when greed is involved.

He didn’t live to see the crash of 29 or 87, or the dom.com boom and bust - but had seen other boom and bust scenarios which were as severe and in some cases more so.

These are extraordinarily tales told in an entertaining fashion, of greed and naivete.

Human nature never changes and just as over 150 years ago, investors lost just as they do today, as humans cannot help succumbing to their emotions, especially when money is involved.

As Mackay says:

"Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper"

This book covers three financial manias:

The Mississippi Madness the South Sea Bubble (from the early 1700's) and the famous Dutch "tulip mania" of the 1600's when tulips sold for a period at a higher price than gold!

"Nobles, citizens, farmers, mechanics, seamen, footmen, maid servants, even chimney sweeps and old clothes women dabbled in tulips."

Why?

Because people bought them and didn’t consider they were not worth a lot really – they were blinded by greed and the greed fed huge price rises, as people simply bid prices up for no good reason.

Mackay correctly points out - that when people are in a crowd, they don’t stop to think logically until it’s too late:

"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."

The greatness of this book lies in the way Mackay shows just how illogical humans become when emotions come into play – they don’t stop to think logically and Mackay covers a whole manner of delusions and mad behavior including, witch-hunts, fortune-telling and many more.

The book doesn’t tell you how to trade - but it shows just how bizarre and how illogical people can be when they get caught up in a crowd.

For investors who think that you can predict human behavior in scientific terms this book will put them on the correct path.

It will also help those investors who think that stocks, currencies and other financial markets are moved mostly by supply and demand fundamentals.

If there is one thing we can be certain of humans are unpredictable when their emotional.

I would have thought the logic of this book was common sense but I meet and talk to traders all the time, who say the markets can be predicted with scientific accuracy.

There is a natural law of investment behavior discovered by Gann, Elliot and Fibonacci, numerous people have told me.

Ignoring the obvious questions Like:

Why didn't they make any money with theor own theory? and if it doesn’t work all the time, it cant be scientific – why do people still believe you can predict human behavior?

You can’t and surely its obvious to anyone.

If anything, a book like Extraordinary Popular Delusions and the Madness of Crowds reminds us how stupid scientific theories are - by trying to predict market movement, as the best anyone can do is trade the odds.

The book maybe over 100 years old - but it is till as relevant today as it ever was.

I wonder how the scientific far out investment crowd would have done trading tulips scientifically?

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