One particular type of current investment madness (SPACs, which I will explain next week) reminded me of a favourite old investment book, “Memoirs of Extraordinary Popular Delusions and The Madness Of Crowds” – some later editions have slightly different names, but it is the same book by Charles Mackay. It was first written in 1841, and my raggedy edition is from 1869.
There are many memorable one-liners, just one of which is that “Every age has its peculiar folly”. The South Sea Bubble spawned one particular folly – today we might call it an IPO or possibly a SPAC. It described the investment proposition as “A company for carrying on an undertaking of great advantage, but nobody to know what it is”.
The following is extracts from the entertaining foreword to the 1980 edition, which I think you will enjoy. All credit and thanks goes to the author of the forward, Andrew Tobias.
“I was doing a term paper on chain letters (of all things) at the Harvard Business School. My faculty adviser — right off the top of his head — suggested I seek out a volume called Popular Delusions and the Madness of Krauts — published, he said, in 1841. My God, I was impressed. What esoterica! (I was also astonished by the title and surprised to learn that Germans, even back in 1841, were called Krauts — or that anyone would have called them that on a book jacket.)
I subsequently learned that any business professor worth his salt would have had this book at tongue’s tip; and that it had to do with the madness of crowds. But for each of us there has to be that first time we learn of this book, that first reading of it. Perhaps this is yours.
If so, you will read of alchemists and crusaders, of witches and haunted houses, of stock speculations and fortune-tellers and, to my mind most wonderfully of all, of tulips. Tulips, in the fourth decade of the seventeenth century in Holland, became the object of such insane and unreasoning desire that a single bulb — about the size and shape of an onion — could fetch a small fortune on any of the several exchanges that had sprung up to trade them. (Not entirely unlike the mania for certain tiny perforated squares of printed paper with stickum on their backs that exists today.)
Not to be missed is Mackay’s account of the unfortunate Dutch sailor who, having been sent down to a rich man’s kitchen for breakfast, and having a particular taste for onions, actually consumed one of the priceless bulbs in error.
As with any true classic, once it is read it is hard to imagine not having known of it — and there is the compulsion to recommend it to others. Thus did financier Bernard Baruch, who claimed his study of this book saved him millions, recommend it in his charming foreword of October 1932.
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Baruch quotes Schiller: “‘Anyone taken as an individual is tolerably sensible and reasonable — as a member of a crowd, he at once becomes a blockhead.'” There are lynch mobs. and there are crusades; there are runs on banks and there are fires where, if only people hadn’t panicked, they would all have escaped with their lives. There was “the hustle,” not so long ago, where large groups of young people learned to dance in lemminglike unison. (I have never actually seen a lemming, but I suspect that when I do, I will see more than one.) And there was the mass suicide at Jonestown.
The month Baruch wrote his foreword, perhaps not coincidentally, marked the absolute bottom of the stock market crash that had begun three years earlier, in 1929. Wild speculation had driven the Dow Jones Industrial Average to 381 in October of 1929 on the wings of what had been a panic of greed. Three years later it had fallen not to 300 or 250 or 200 or 150 or even 75 but to 41. Unreasoning greed had turned inside out. It had become unreasoning fear.
“I have always thought,” Baruch reflected on this sorry state of affairs, “that if… even in the very presence of dizzily spiralling [stock] prices, we had all continuously repeated, two and two still make four,’ much of the evil might have been averted. Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: ‘They always did.'”
In the late 1960s, stock prices again began to spiral dizzily. Market mania. Synergy was the new magic word, and what it meant, in essence, as various corporate presidents and stock promoters explained over and over, was that two and two could, under astute management, equal five. It was alchemy of a sort and enough to drive at least one stock, in two years, from $6 a share to $140. The talk of the town. Not much later it sold for $1.
By late 1974, stocks generally had fallen, slumped, slid, and otherwise eroded in value to depression levels. The crowd had not just left the party — it was stoning the host. Yet had you had the courage, in December of 1974, to buck the crowd — which in a way is what this book is all about — gains of 500 and 1,000 percent over the ensuing three to four years would have been common in your portfolio.
Not that you must be a stock-trader to benefit from the perspective this book provides. Should the government balance its budget? Should the Fed loosen or tighten credit?
Read in the very first chapter a tale of money printing and speculation in early eighteenth-century France that should give any deficit spender, any easy-money advocate, severe pause. (Read, too, of the hunchback who supposedly profited handily renting out his hump as a writing table, so frenzied had the speculation become.)
Mackay describes Frenchmen “ruining themselves with frantic eagerness.” And then in the second chapter the lunacy spreads to sober England, where, Mackay says, “every fool aspired to be a knave.”
If you read no more of this book than the first hundred pages–on money mania–it will be worth many times its purchase. [It is these 100 pages that are included here, on this website in their entirety.]
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Once upon a time there was an emperor with no clothes. For the longest time no one noticed. As you will read in this marvelous book, there have been many naked emperors since. There will doubtless be many more.
Andrew Tobias
November 1979
NEW YORK CITY