valuestockplayers.com Book ReviewsExtraordinary Popular Delusions: And the Madness of Crowds (Great Minds Series)
by Charles MacKay
If you are a stock market investor, than this book must appear as one of your top 10 books to read. Investors really have no choice but to read this book because unlike any book you will ever read, this book teaches you about the CROWD. What motivates the crowd, and what causes people to join the crowd. If you were to ask any of the famous investors you have read about, every one of them is aware of the importance of CROWD PSYCHOLOGY. Warren Buffett has always talked about Mr. Market, which he learned from Benjamin Graham.
Now having said this let me tell you quickly what this book is about. MacKay in a brilliant, and in an interesting manner takes you through 700 pages of mass buying panics from centuries ago. These include The Witch Mania (100 pages) in the 15th and 16th century. The Crusades (100 pages), Alchemy (160 pages), and the Poisoners- hey, poisoning people was a big thing centuries ago- remember Napoleon.
The big buying binge that most people recognize is the South Sea Tulip Craze, where the participants bid up the price of tulips, yes tulips to the equivalent cost of houses and more. We're not done, MacKay goes through many, many more crazes, panics, and buying binges. All of these stories involve the CROWD. Extraordinary Popular Delusions... has survived the test of time. We do not know if anything being written today, or any studies being researched currently will be able to stand the time test? We only know that MacKay's book has.
Is the book interesting?
Yes it's fascinating, but you have to be interested in this subject. If you are in the financial markets you have no to STUDY, NOT READ this book. I say this because I have been a money manager and history buff for 35 years. If I did not live through the modern equivalent of MacKay's book, frankly I wouldn't believe half the stuff that is in this book, which is presented as truth.
The reality is I have seen MacKay's explanations work out in my own lifetime, and so have you. A few 20th century equivalents are in order:
1) INTERNET STOCK MAREKT CRAZE: 1999 - 2000 Wow, I did an analysis of the market value, of a major Internet stock in play at the time of the craze. The stock was representative of hundreds of other companies participating in the run-up in value. One day, I discovered that this Internet stock's market value was the equivalent of ten major corporations combined. These companies included IBM, GM, Ford, Chrysler, Electronic Data Processing, JC Penny, Sears, and others, all combined. It couldn't be. Did I calculate wrong? It was true, and the number was getting bigger every day.
Over $1.4 trillion dollars had been committed to Internet stocks by some of the smartest savviest people in the world. When it was over, that $1.4 trillion was reduced to under $100 billion. Over 90 plus percent of the value had simply disappeared. This was Extraordinary Popular Delusions all over again, and you lived through it too.
2) Personal Note: During the Internet Craze, I was re-tooling by taking courses at Harvard University. Every five years, I try to do this. I would drive up once a week and spend eight hours in financial classes with some of America's truly outstanding teaching professors to see what's new in academia that hasn't hit the money management industry yet. These world-renowned professors all got swept into the Internet stock market craze. They personally lost substantial pieces of their net worth. Every one of them was claiming that we were in a new age. They were throwing out their financial training out the window.
These were Professors who had read every page of MacKay's book, underlined it, annotated it, and even memorized sections. This is what you need to know. The first words that come out of a person's mouth involved in mass hysteria are - THIS TIME IT WILL BE DIFFERENT. It's a dead giveaway that we are in a POPULAR DELUSION.
3) The American Invasion of Iraq: Forget whether the President was right or wrong. Every intelligence agency in the world believed that the Iraqi's had weapons of mass destruction. David Kay, perhaps the smartest man in government believed it. This again, is an example of the crowd psychology in action.
4) Bay of Pigs invasion of Cuba- President Kennedy as smart a man as they come got swept up into the crowd psychology believing along with everyone else that 1500 poorly trained Cubans could land on a beach in Cuba, and then suddenly without support, walk their way into Havana picking up ordinary people on the countryside who would swell their ranks and allow these expatriates to overthrow the Castro regime. These were the smartest men in government that believed this.
The list goes on and on, and if you the reader live long enough, you will see yourself swept up in these instances of mass hysteria. If two Presidents of the United States can get caught up in crowd psychology, we all better be on the lookout for it. Good luck.
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