Extraordinary Popular Delusions and Madness of Crowds is considered is a book all investors should read and while we live in so more advanced time today, the crowd still act in the same way as they did over a century ago when Mackay wrote the book and will behave in the same way a hundred years into the future.
Financial Booms and Busts
Mackay France's covers the Mississippi Scheme, the South Sea Bubble from the 18th century and also the Dutch "tulipomania" of the 17th century. The book goes through the manias, the boom and the inevitable crash that follows and if you don't know them from school, this book will introduce to them and the madness of the crowd when greed takes hold and greed turns to fear. Here is a fantastic quote which illustrates the madness of the crowd when greed takes hold and creates a financial bubble:
“At first, as in all gambling manias, confidence was at its height, and everybody gained. The tulip jobbers speculated in the rise and fall of tulip stocks, and made large profits by buying when prices fell and selling when they rose. Many individuals grew suddenly rich; gold bait hung temptingly out before the people, and one after the other rushed to the tulip marts like flies around a honey pot. Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland and pay whatever the price was asked for them. Homes and land were offered at ruinously low prices or assigned in payment of bargains made at the tulip mart. At last, however, the more prudent began to see that this folly could not last forever. Rich people no longer bought the flowers to sell them again at a cent per cent profit. It was seen that somebody must lose fearfully in the end and, as conviction spread, prices fell and never rose again.”
In the 17th century tulips became a status and a fashion symbol and the prices rose dramatically when the mania had reached its height in 1636 a single bulb cost 5000 Florins or around $25,000 in today’s prices. Of course people still act like this today and the .com boom and bust is another example, where companies with no assets or value, were bought by the public in a frenzy of greed which soon ended up in a crash
Of course this has always happens with stocks and the Mississippi madness saw John Law sell stock which had no value at all but the public bought it. The initial stock offering was at 400 livres in 1716 and by 1720 the stock had appreciated 40 times from the original price. Investors created a speculative bubble, inflation increased and prices spiralled by 300% as investors spent their paper profits:
“The looms of the country worked with unusual activity to supply rich laces, silks, broad cloths and velvet which, being paid for in abundant paper, increased in price... new homes were built in every direction, an illusory prosperity shone over the land, and so dazzled the eyes of the whole nation, that none could see the dark cloud on the horizon announcing the storm that was too rapidly approaching.”
Crowds Never Change
Crowds are the same today, as they were in yester year and they will always push prices to far to the upside when greed takes hold and there is always a crash - this is just simply human nature. The financial pages of the book, take up the first 100 pages but its 700 pages long in total and covers many other popular and delusions of the crowds.
Crowds Never Change
It covers Alchemy which covers another 150 pages, on how seriously intelligent people thought they could turn base metals into gold, if only they could find the right recipe and make their furnaces hotter. The book also covers animal magnetism, prophecies, which hunting, fortune-telling, haunted houses and much more, with perhaps my favourite being the the slow poisoners. The logic the slow poisoners had was it simply wasn’t murder, if you just poisoned a person slowly.
An Investment Classic
The book is heavy going in places but you can pick the bits you want to read but which ever parts of the book you do read, you will soon see why its a valuable investment book - when the individual becomes part of the crowd, he becomes illogical and emotional. This book should be read with Gustav Le Bon's classic book "The Crowd and you will often see them sold as a set.
As an investor, if you can judge crowd sentiment you will avoid losing money and be able to go against the crowd at important turning points. The crowd is always greedy and will always act irrationally just as these people did when they went to buy John Laws worthless Mississippi stock:
“The public enthusiasm, which had been so long rising, could not resist a vision so splendid.”
The book is one to read and enjoy - sure its over 100 years old now but human nature has never changed and never will and that’s why any Forex trader or investor should read it. Its a great read in my view but at 700 pages it means, you will probably want to miss sections that don't interest you. One other point is - try and read this book with Gustav Le Bon's the crowd as they compliment each other. Would we recommend this book? Yes we would, you want learn a Forex strategy but you will learn about the crowd and psychology and this book is great insight into crowd behaviour.