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Extraordinary Popular Delusions and the Madness of Crowds

by Charles Mackay (1841)

Confusíon de Confusiones

by Joseph de la Vega (1688)

a two-book volume with commentary and editing by Martin S. Fridson, 1996, John Wiley & Sons, 214 pages, hardcover, ISBN 0-471-13309-4.

Here are two, bundled books that are recognized classics in the securities investment communities. The books are noteworthy in (1) that greed and avarice are persistent human traits and (2) the features of modern stock trading were remarkably in place in 17th century Europe.

These books were on a recent list of the top ten investment books ever written. Perhaps the lessons are timeless. Persons familiar with historical investment manias will recognize the Dutch tulip craze, the Mississippi scheme (1719-20), and the South-Sea Bubble. Not only were individual and institutional investors caught up in their greed, but these episodes very nearly ruined leading countries.

Marting Fridson, Editor, adds substantial value in putting these historical books into modern context. The foreword is by Peter Bernstein, author of recent and popular books, such as Against the Gods: The Remarkable Story of Risk (Tip034).

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, 1841

There are three chapters:

The Mississippi Scheme. John Law was a Scott gambler who became, in effect, the treasury chief of France. For the most part, his advice to the government was sound. However, he conceived that a new company should be formed to exploit the riches in the Louisiana area in America. The area was reported to abound in riches of precious metals. France issued stock in the Mississippi project in 1717, and frenzied speculation drove the value of these shares wildly upward. As the speculated wealth never materialized, the collapse nearly bankrupted the company.
The South-Sea Bubble. Slightly earlier, in England, the South-Sea Company was founded for trade to the South Seas. In particular, was interest in the gold and silver mines of Peru and Mexico, which everyone believed to be inexhaustible. "Visions of boundless wealth floated before the fascinated eyes of the people in the two most celebrated countries of Europe." Innumerable companies sprung up everywhere in England. People were investing in companies, such as one proclaiming only that it was to be "a company for carrying on an undertaking of great advantage, but nobody to know what it is." Another company was founded for "extracting silver from lead," and another for "a wheel for perpetual motion."
The Tulipomania. Tulips became very popular flowers during the early 1600s. It grew in popularity, and in 1634 "it was deemed a proof of bad taste in any man of fortune to be without a collection of them." Merchants began to compete for rare flowers and the prices they would charge for them. The rage to own tulips grew so great that the Dutch began to neglect the ordinary industry of the country. Prices for bulbs escalated in a frenzy. Of course, the high prices were a bubble which ultimately collapsed, ruining innumerable wealthy and ordinary families.

These historical bubbles are entertaining reading and illustrate the extents to which greed can work.

Confusíon de Confusiones by Joseph de la Vega, 1688

The introduction for this volume is by Hermann Kellenbenz, publisher of the 1957 reprint. This book is written as conversation and describes the operation of early stock markets in the 1600s. Most investors think the modern stock market is a recent invention. What is remarkable about this short book is its description of trading that is much the same as today. Terms like "shareholder," "brokerage fee" and "bears and bulls" were used. Limit orders, margin calls, and front-running are example market features then, which are still applicable today.

This 2-book volume is useful in reviewing how stock markets evolved and the occasional disastrous speculative frenzies. The reading is interesting though sometimes is a bit tedious. I was often frustrated in trying to convert currencies of the day into modern values. The book will be especially interesting to investors interested in the behavior of market participants.

—John Schuyler, November 2003.