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Investing Mania's compare today with the old days We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. (from the introduction of Madness of Crowds)
Extraordinary Popular Delusions And The Madness Of Crowds read
a few of the chapters of this book Tulip bulb prices in 1637-actual prices 4/8 |
Bernard L. Madoff
Here we go again - NY Times story Times Lists of investors --click here to see 163 pages of pdf list
(See full Madoff Client List)
KL Group - Another hedge fund fraud A new bubble does not start just as the last one crashes |
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1929
newspaper stories Multi-Level Marketing The Great Diamon Hoax of 1872 Ida M. Tarbell's
exposee of Standard Oil Saving and
Loan Crisis a chronology from the 1970's “Where were the auditors? and Crazy Eddie Anthony "Tough Tino" De Angelis, perpetrator of the Great Salad Oil Swindle of the 1960s
Billie Sol Estes obtained federal agriculture loans using
phantom fertilizer tanks as collateral. Have you
ever tried to sell a diamond?
Mirage of Multilevel Marketing Herbalife This is the story of how Herbalife works. Hoax
Index--great list of current hoax's Real Estate authors and where they ended up Another link
Ivar Kreuger,
the "Match King." Always a swindler, transferring funds, credits,
debits among 400 subsidiaries.
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Recent schemes PinnFund USA Evergreen International Spot Trading, a currency trading outfit, and First Equity, its clearing firm, allegedly devised an international boiler-room scheme that cheated investors out of $100 million. According to charges filed by the U.S. Attorney's office, Evergreen used cold-calling to convince investors to trade in foreign currency, while allegedly lying about its performance record. Most of the investors' money later was secretly channeled to bank accounts in Hungary and Austria, where the obliging folks at Evergreen and First Equity withdrew it for their own use and to pay millions of dollars in employee bonuses. Enron--It happens in modern times. This story is when the stock was $50 a share. Stock market in 2001 Bankruptcy Data for 2000-01-02-03-04-05-06-07 The Secret World of Mike Milken by Epstein If you have any good links let me know ZZZZ Best Company
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| Previous Mania's | Where | When | Period | Run-up | decline |
| Tulip Bulbs | Holland | 1634-37 | 36 months | 5,900% | 93% |
| South Sea Shares | Britain | 1719-20 | 8 months | 1,000% | 84% |
| American Stocks | U.S. | 1921-29 | 95 months | 497% | 87% |
| Silver | U.S. | 1979-82 | 12 months | 710% | 88% |
| Japanese Stocks | Japan | 1965-89 | 288 months | 3,270% | 63% |
No two financial manias are alike, but were a mania a love relationship, it'd be a multi-year affair rather than a one-night stand.
This is not what we imagine from watching footage of the most famous mania ending, the crash of 1929, the first such collapse captured on film (and surely not the last). Grainy black-and-white documentaries leave the impression that the market crashed on Black Monday and soup lines formed by Friday. In fact, the market took some three years to bottom out and many mini-rallies took place along the way to the depths of the 90% decline, dragging down many who escaped the first wave of destruction.
The 1920s bubble was only a few years in the making. Our bubble has had nearly six years to form. It cannot be expected to disappear like that glorious rainbow-colored orb your brother maliciously jabbed. No, wrong analogy. The word "bubble" does not convey the financial mania dynamic faithfully into the physical world. Some manias run for a short intense period like a fireworks show run amok, quickly burning out. Others develop in fits and starts, like a storm rising up in great waves, falling back, then rising still higher. The current bubble is of the latter type. The storm has been raging for years. And lately, the waves are getting pretty wild.
Every student of the markets knows psychology plays an important part in market dynamics, although no one knows exactly how. No tools for measuring sentiment or other elements of market psychology have statistically meaningful predictive powers. But at core, it's surprisingly simple. Humans mostly decide what to do by observing others they perceive as similar to themselves, comparing the observed behavior to their personal normative standard, and taking action that is an average of the two. Each individual has his or her own reference point for what is "normal" behavior but an individual will act in ways that are very far from their personal normative boundaries to a lesser or greater extent depending on, 1) the number of other people "like them" who are behaving like each other and, 2) the length of time the group has been engaging in the behavior.
A financial mania, like any aberrant and self-destructive group activity, grows as new entrants and the passing of time legitimize the activity. Much research demonstrates this dynamic of human behavior, including studies that followed the famous case of the woman who was stabbed to death over a period of hours on a crowded New York City street many years ago. The studies concluded that if you are attacked, you are far safer in the company of a single witness who is likely to judge the inappropriateness of the attacker's behavior and take personal responsibility for your rescue. In a crowd, individuals take the inaction of others as a cue that inaction is the right course, leaving you to your unhappy fate. It is no revelation to apply this concept to group dynamics in financial manias, for as Charles MacKay observed way back in 1841's Extraordinary Popular Delusions And The Madness Of Crowds, "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."
The individuals with the strongest will or motivation to employ their personal standards in contradiction to the group's behavior naturally join in last. In the case of a financial mania, the most risk-averse members of society join in when intuition misinforms them that the risk is at its lowest, because so many people are involved and the mania has lasted so long. In fact, that's when the risk is at its highest. This is the so-called "widows and orphans" stage.
The friend whose remark launched this piece is a financial advisor in Boston. She works for a staid firm with many rich, elderly clients. She noted last week that she was beginning to get calls from her most conservative clients, asking why she had not recommended the purchase of Internet stocks, angry that they were missing out on the spectacular capital gains. These are men and women who lived through the crash of 1929. This development alarmed her. And well it should -- for it portends the final stage of this financial mania, the one that draws in the those who can least afford to lose, those too old to make their money back. They are also the final source of new money for the mania, indicating that the mania is about to run out of fuel.
What sets up a market crash is the anxiety that forms from cognitive dissonance. As the mania progresses, an ever-widening gap develops between each individual's reference point of normality and the extreme behavior of the group. An unconscious desire to close the gap by any means intensifies over time. In the latter stages of a mania a number of influential figures in the mania step up to address these anxieties with elaborate justifications, such as Irving Fisher's "scientific" analysis of the New Era economy that "explained" the historically unprecedented stock prices in 1929 and, in our time, recent books such as DOW 36,000 and DOW 100,000. In spite of the analytical acrobatics, each mania participant's normative compass remains intact and the anxiety persists, leading to the desire for mania participants to "throw themselves from the precipice for fear of falling," in the words of Ambrose Bierce.
What causes each individual to jump is an unpredictable event that causes an epiphany. Imagine participants in the 1920s mania viewing a film in 1930 of themselves in a soup line. Still think they'd standing in line to buy stock with hard-earned money, or borrowed money? All this happens in the mind's eye during the epiphany. Unfortunately for each individual, the destruction of the mania feeds on itself by the same process that caused the growth of the mania: observed behavior of other participants. Whereas before they were all buying because they saw everyone else buying, now they are all selling because everyone else is selling.
In my last piece, I identified the four events that will most likely trigger the mania's end: credit squeeze, bankruptcy, fraud, or weakness in the real economy (or any combination). Since then three of these elements have developed. Long-term interest rates have risen 250 basis points, the SEC indicted Tokyo Joe for pushing stocks he owns, and home and SUV sales -- the bellwether consumer items of the mania -- have begun to fall significantly. So far no high-profile bankruptcy has developed, but all that is required to create an avalanche of bankruptcies is the failure of the Fed to quickly reflate the money supply after the next correction; if public and private capital hides for more than a quarter or two, many unprofitable iTulip.com companies will not be able to raise new capital in the markets to pay the bills. As these companies fail, more capital will be frightened away from the market, causing more to fail, and so on.
The end of a mania is a sad event. So do not be impatient to
see it end. For afterward, all that once seemed a community of warmth and
lightness and fun turns cold, dark and lonely.
ERIC JANSZEN
Do you have any good fraud links?
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