Tip of the Week #95 Tip Index

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Markets, Mobs & Mayhem: A Modern Look at the Madness of Crowds

by Robert Menshel, foreword by William Safire, 2002, John Wiley & Sons, hardback, 226 pages, ISBN 0-471-23327-7, US$24.95.

Here is another fun book about irrational people — or about people (most all of us) who often behave irrationally. This is an entertaining read, augmented with lots of cartoons, photos of mobs, and short-quotes:

"The four most expensive words in the English language are "this time it's different." — John Templeton

The examples are recent, including 9-11 and the anthrax fear "epidemic" that swept the nation. Enron and terrorists get due attention.

The earliest markets discussion is about the "Tulipmania" that gripped Holland in the early 1600s. Select tulip bulbs reached as high as $110,000 each, in today's money. This was made possible by the Dutch invention of the stock market a few decades earlier and the newfound prosperity Holland found as a leading trading nation. Other historic bubbles include the South Sea Company (England, early 1700s), the Mississippi Company (France, early 1700s), and the Florida land boom (U.S., 1920s).

"As distinct as each bubble market is, the psychology that drives investors is always essentially the same." The 1920s Securities and Exchange Company, headed by Charles Ponzi (for which "Ponzi scheme" is named) was mostly in the business of manufacturing false earnings statements. The recent Enron meltdown is reminiscent of the crooked accounting practices of Middle West Utilities in the 1930s. Columnist Paul Krugman wrote, "the most admired company in America turned out to have been a giant Ponzi scheme."

"If there is one uncomplicated and consistent lesson that equity markets teach, it is this: They are self-correcting in the extreme." Stock crashes are an opportunity to buy! Menshel's 14 rules of stock investing are on pages 49-51, entitled "Keeping Your Head When All About Your Are Losing Theirs." Here are a pair of excerpts:

Remember that stock markets are always shifting between greed and fear. ... At the extreme of fear, when all the excess has been wrung out of the market, great buys are all over the place.
The faster a stock has run up in value, the faster it is likely to run down. Almost no company can safely grow earnings faster than 15 to 20 percent a year without attracting fierce competition."

This is a fine book, also endorsed by Peter Bernstein (who wrote Against the Gods: The Remarkable Story of Risk). For persons who like to keep apart from the crowd, this book offers many examples and insights about the psychology of herds.

—John Schuyler, January 2003.