The Daily Reckoning PRESENTS: 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… POPULAR DELUSIONS
By Addison Wiggin 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 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 highly recommend you get your own copies: Confusion de Confusiones and the Art of Contrary Thinking You can also grab Christoph Amberger's newest book here: Hot Trading Secrets
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