CHAPTER EIGHT

TECHNICIANS, ECONOMISTS, AND OTHER COSTLY EXPERTS

WITCH DOCTORS OF WALL STREET

 

Technicians, Economists and Other Costly Experts operate by one of two motives—they either empower you or empower themselves. Those empowering you offer tools or lessons you can learn to use on your own so that, as you go forward, you are more powerful than you were before; those empowering themselves sell you something intangible, like their reputation or forecasts, but without the underlying support and reusable lessons that have lasting impact for you.

W.C. Mitchell, John Magee, and William P. Hamilton empowered others, not themselves. Dealing in statistical and technical information, they provided followers and readers with the know-how to further their knowledge on their own—without charging directly for the expertise. Hamilton, for instance, as a pioneer of “technical” stock market analysis, empowered people through hundreds of Wall Street Journal editorials that explained how to use the Dow Jones Averages to forecast the future. Mitchell, as a statistical pioneer, did much of the work that led to modern economic and financial statistics everyone uses today. While Magee wrote books, believe me, the royalties off financial book sales are pretty paltry. And in them he laid out his vision in a clear fashion anyone could learn.

By contrast, Evangeline Adams, William Gann, R.N. Elliott, Robert Rhea, and Irving Fisher were interested primarily in empowering themselves. If they had some sort of gimmick or stock market “secret,” it was kept private unless some sort of fee was involved, usually in the form of a newsletter subscription rate. And then it was sold only in a format that others couldn’t really grasp; to employ it would always require the great guru himself (or herself in the case of Evangeline). Rhea, for example, unlike his more generous guru Hamilton, proclaimed himself the expert Dow Theorist and sold his personal word on how the theory worked in his newsletter. But a lot of his writings were vague and his methodology unclear. Two people looking at the same chart and, having read Rhea’s methodology, might come to completely conflicting views on the same stock—simply because a lot of Rhea was simply inside Rhea and inaccessible to the masses.

Those empowering themselves are easiest to spot, because they make a living by keeping their names alive, creating a ballyhooed reputation when there is little to ballyhoo. Generally, they are publicity hounds and, often, rich from their efforts. Irving Fisher, for example, was a typical economist, no better than any other, when he began constantly and adeptly promoting himself. With great academic credentials and strong academic contributions in monetary theory, Fisher couldn’t cut it when it came to real-world predictions. But despite several wrong calls, he made it to the ranks of “the world’s greatest economist” and, consequently, grew wealthy. In the 1920s he was heavily visible, continually forecasting economic boom. He missed calling the 1929 Crash and then, after the turn, he dug his heels in further, saying that good times and higher prices were immediately ahead. Ironically, he died poor by putting his money where his big mouth was during the Crash and Depression.

Evangeline Adams empowered herself by becoming one of the first newsletter quacks, publishing and selling stock market picks for a fairly steep price during the 1920s bull market. She already had a spiffy reputation as a fortune teller, so promoting her role in the market was that much easier. Her gimmick—astrology—was so elusive, so vague, so dubious that it would have been impossible to actually teach others her trick. So, she willingly reaped the benefits of her more-entertaining-than-profitable newsletter.

William Gann sold his newsletter to market a theory he created that was too complex for most to follow on their own—a gimmick almost as novel as Adam’s. Selling something clients can’t easily do on their own is also comparable to selling something as intangible as an inflated reputation—it is pure self-empowerment. Even to this day folks market themselves as latter-day interpreters of Gann, but there is no clear body of knowledge that is consistently employable by Gann fans.

R.N. Elliott never personally sought to empower himself by hawking his cyclical stock market theories . . . those who resurrected him did! From out of the blue in the early 1980s, Elliott’s obscure name and theories popped up in books, financial magazines and customized newsletters, and those responsible for the publicity eagerly took advantage of his new-found popularity. Again, like the others, Elliott’s theories are too vague and mumbo-jumboish to be employed with much precision, and again, his fans argue among themselves as to how to interpret things based on his theories—it is all self-empowerment.

Not everyone involved in the stock market system is out for his or her own interests. As mentioned above, W.C. Mitchell empowered others by sharing his years of intense research on business cycles and market indices. Had he wanted to, with the respect he had garnered, he could have hawked mumbo-jumbo but was above that kind of activity. John Magee offered as easy an explanation of charting as is possible, available to anyone free of charge in most libraries. Hamilton presumably could have made a pretty penny selling his knowledge through a newsletter that contained subjective forecasts similar to Rhea’s—but he didn’t. When you look at the ever present nationwide menu of experts selling services, the first question you should ask yourself about any one of them is: “Does interacting with this expert leave me more able to act on my own afterwards, or simply hook me to the guru du jour?” If you don’t get something more than a forecast, the guru’s fee is often too costly.

Of course, there are exceptions. Yet, for the most part, they are rare enough to be the exceptions that prove the rule. Numerous studies show that economists’ forecasts, as a group, are very wide of the mark (for a good introduction to these studies see David Dreman’s The New Contrarian Investment Strategy). There are no studies pointing the other way.

Still, individuals are always unique. Consider the economist John Maynard Keynes, whose economic theories were widely hated and bad-mouthed by conservatives then and now. Yet he was an economist who could actually trade stocks successfully, while founding his radical theories. The weight of his trading success makes him more credible than conservative theorist Fisher, who couldn’t put his theories into practice. Somehow, Keynes was vastly more “real world” than Fisher. Another great exception was Edson Gould. For most of his career he was a completely obscure forecaster who was almost uncanny in his accuracy. He was no self-promoter and never boasted a gimmick or even his own predictions. Ironically, he went all but unnoticed until he was practically dead himself, when he was “discovered” as an old market seer in his 70s.

There are always exceptions proving any rule. Life is full of quirks, and Wall Street is no different. For the most part, financial gurus aren’t worth the price. Most of them are either phony or nebulous. The real “value added” which any one of them may offer is best measured by looking at whether, from his or her teachings, you can empower yourself to move better through life on your own than you could have before your interaction began.

WILLIAM P. HAMILTON

THE FIRST PRACTITIONER OF TECHNICAL ANALYSIS

It was no fluke when journalist William Peter Hamilton decided to devote his life to the development of the Dow Theory. He felt there were definite reasons for market movement, reasons that could be predicted fairly accurately—using Dow’s theory. He once said, “The stock market is the barometer of the country’s and even the world’s business, and the (Dow) theory shows how to read it.” From the early 1900s to his death in 1929, Hamilton studied, explained, developed and asserted the Dow Theory to provide a foundation on which future generations could build—and technical analysis would thrive.

The Dow Theory is based on the belief that the stock market always reflects three distinct movements:

1. A primary trend of four or more years.

2. A secondary reaction of about two weeks to a month.

3. Day-to-day fluctuations.

The primary movement has been compared to the tide of the ocean; the secondary reaction has been compared to the waves, which sometimes sweep up on the beach despite an ebbing tide or fall back despite a rising tide; and the daily fluctuations, to ripples and splashes that are unimportant by themselves, but must be considered in the whole picture. The primary trend was said to be bullish when the average of one high point tops those of previous points—just as the tide is said to be rising when waves peak one another.

“It admits highly human and obvious limitations. But such as it is, it can honestly claim that it has a quality of forecast which no other business record yet devised has even closely approached,” Hamilton said. One of his most important contributions to the Dow Theory was simply putting it to work in making forecasts in popular Wall Street Journal and Barron’s editorials. Forecasting was something Charles Dow rarely did, but maybe should have—since Hamilton compiled an impressive record. Applying the theory between 1900 and 1921, he forecasted the Panic of 1907, the sluggish market preceding World War I and a bear market in 1917—in all, six major bull and bear markets.

His most famous prediction was an October 21, 1929 Barron’s editorial titled, “A Turn in the Tide,” which gave “a distinctly bearish warning” to investors right before the Crash. While he’d indicated an end to the great 1920s bull market three times since 1927, this time the signs were unmistakable. On September 3, the Dow Jones Industrials hit a high of 381.17 and the Railroads, a high of 189.11. Within a month, the Industrials declined 56 points, and the Railroads, which usually fluctuated very little, fell over 20 points. “The severest reaction from the high point of the year had just one month’s duration. In view of the nationwide character of the speculation, this seems a dangerously short period to infer anything like a complete reverse in public sentiment.” Three days later, panic swept across Wall Street on what became known as Black Thursday. A few weeks later in October, he died.

Born in England in 1867, Hamilton described himself as “an incurable newspaper man.” Sporting neatly combed hair, mustache and spectacles, he went into the news business at age 23, working in London and throughout Europe. In 1893, he covered the South African Matabele War, then remained in Johannesburg as a financial writer. He was an eager reporter and believed “the man on the desk must know as much and more about the news he handles as the reporters who write it.” At age 32, Hamilton came to Manhattan and joined the WSJ in 1899, working closely with Dow. Nine years later, working for Clarence Barron, he took over as editor of the editorial page and held the post until his death at 63. In 1921 he became executive editor of the newly created Barron’s.

En route, Hamilton wrote The Stock Market Barometer in 1922, explaining the Dow Theory in detail. It began as a newspaper assignment but blossomed into a 278-page doctrine for Dow theorists. Successful and controversial, it gave the theory much-needed exposure, since many were still dubious of it.

Hamilton also revised the theory, saying that both the Railroad and Industrial averages must corroborate each other before any prediction for a change in the market can be given. He was the first to “make a line” in the same way that more modern technicians create “support” and “resistence” lines on stock charts that are supposed to represent floors and ceilings for stocks. When stock prices fluctuated within a narrow margin and stayed within his “lines,” there was little being indicated except that stocks were being accumulated or distributed. But it was unclear at that time as to which was the case, accumulation or distribution. The buying and selling seemed relatively in “equilibrium.” It was only when the two averages broke out of their lines and rose above their high points that this action foretold a bullish outlook on the market; when the averages fell below the high point, it was a bearish sign, since the market had obviously been saturated.

“The market is a barometer. There is no movement in it which has not a meaning. That meaning is sometimes not disclosed until long after the movement takes place, and is still oftener never known at all.”

Hamilton’s role in journalism, while great, is not sufficient to include him among the minds chronicled in this book, but his role in creating technical analysis as a field is more than sufficient. Some people think and others do. Dow thought and created an index and pondered it. Hamilton put it to practice as a workhorse. He was the first serious practitioner of the art of forecasting future stock action based on precise prior action. Ditto for his forecasting of the economy based on the market. It is a well established fact that the market is among the better leading indicators of the economy, even if imperfect. At a time when no one was watching it in that regard, it was certainly a better economic forecaster than it is now when so many market mavens fixate on the market’s every move. Hamilton was not just an intellectual pioneer, but he was also ready to put his ideas and reputation on the line, in print, where others could ridicule him. They were never able to.

EVANGELINE ADAMS

BY WATCHING THE HEAVENS SHE BECAME A STAR

The Roaring 20s were crazy, and naturally everyone wanted his personal piece of the action and the big fat profits that went with it. Some invested cautiously with their meager savings, others speculated their already-large fortunes making them larger—but whether rich or poor, smart or stupid, experienced or fresh, most looked for a system that would guarantee their success. Scores of clever promoters eagerly provided myriads of “unbeatable” systems. Some promoted the premise that no bull market would break in a month without an “r” in it; another depended on sunspots; yet another went by moon cycles. At least one self-appointed market guru claimed he had the ultimate inside information—from God! There was even an Oyster Theory that predicted the market would peak during oyster season. No theory was crazy enough; each had its own following. There were enough suckers for every kooky system concocted.

By far the most famous nontraditional investment system was that of Evangeline Adams. Touted as a descendant of President John Quincy Adams, Evangeline had some 125,000 subscribers to her 50-cent newsletter in which she predicted future market activity. The truly rich and famous regularly sought her services in her Carnegie Hall studio. J.P. Morgan, steel magnate Charles Schwab, movie star Mary Pickford, even England’s King Edward VII were among her clientele. Her catch? Fortune telling!

Adams may not have paved the road for women in the investment business, but for a while she made Wall Street stop and listen. Already a famous fortune teller by the turn of the century, she apparently wasn’t able to predict the great bull market of the 20s in advance, but by 1927 she knew a good thing when she saw it and jumped into the act—and her fame skyrocketed along with the bull market’s last legs upward. She was adored by investors and got rich from marketing her prophecies. Her monthly newsletter—tagged “a guaranteed system to beat Wall Street”—predicted stock activity via the changing positions of the planets. For $20 per reading, she would predict where the Dow Jones Industrials would lead. The more she charged, the more popular she became! Some 4,000 fans wrote her daily asking for their future in the stock market.

Hailed as “the wonder of Wall Street” and “the stock market’s seer,” Adams stocked her studio with all the props of a respectable broker’s office. First, she presented herself in her trademark, business-like black suit and spectacles in keeping with her stern mouth, confident voice and shrewd, serious manner. In the waiting room, fur-coated women and well-suited men milled about, chatting in unison about their stocks and bright futures while waiting for their individual consultations. A ticker tape machine dutifully hummed out quotations and copies of the Wall Street Journal were displayed prominently. The walls were lined with paintings and photographs of her most famous clients—King Edward, Schwab, Pickford and, of course, Morgan.

Morgan held a special place in Adams’ heart and vice versa. He supposedly swore by her after loaning her $100 million when she said his rising sun, Aries, was favorably positioned. Legend has it he profited well from the loan and, afterwards, took her cruising on his yacht to conduct “scientific investigation” into her miraculous powers. Results from the “investigation” were never uncovered!

Adams’ accuracy wasn’t astounding, but that didn’t stop people from acting on her predictions. In a bull market people will believe anything. Indeed, when she predicted a “violent upswing” on February 15, 1929, she enjoyed a violent upswing in her subscriptions. In May, 1929, she predicted the month’s breaks with precision, but on Labor Day, on her radio program, she claimed “the Dow Jones could climb to Heaven.” That had to be one of her more famous lines, since she managed to blurt it out during a Friday evening, holiday-weekend rush hour, when countless commuters had their car radios turned up.

When the Crash finally came, she was said to have pinpointed the market’s pre-noon peak 24 hours in advance. That Black Thursday evening she was forced to hold mass sessions to accommodate the long lines out her door! Will the market recover? Is it worth hanging on to my stocks? Should we cover our margins? People were panicky and sought refuge in Evangeline’s holy words—and she didn’t let them down. Adams consoled her followers, assured them the market would rise, pocketed the fee and that night, when her broker told her she was $100,000 in the hole, she told him to sell out her position first thing in the morning.

Born sometime between 1868 and 1872 in Jersey City, Adams was educated in Andover, Massachusetts. She studied astrology, and in 1899, she became a star when she predicted a certain disaster: Her horoscope told her she should go to Manhattan on March 16, 1899. So, she checked into the Windsor Hotel and that evening consulted the stars of the hotel owner. “I hastened to warn him that he was under one of the worst possible combinations of planet conditions, terrifying in their unfriendliness.” The next day the hotel burned to the ground, taking with it the owner’s family. Fortunately, somebody, probably she, remembered to tell the papers of Adams’ incredible foresight, making Evangeline a household name—particularly in prominent social, political and theatrical circles.

Rather matronly looking, she was married in 1923 to a former astrology pupil. She kept her name in the news by making major predictions. She guessed the duration of Lindbergh’s first transatlantic flight correctly within 22 minutes, predicted Rudolf Valentino’s death within a few hours and foresaw the 1923 Tokyo earthquake within a few days. In 1914, she won a court case that had challenged her legal right to practice astrology as her profession. A fan of the occult, Adams penned several books on astrology and her autobiography, The Bowl of Heaven, in 1926.

She died in 1932. Evangeline Adams demonstrated two simple principles. First, if you predict enough wild and crazy things and publicize the few that come through, folks will remember the hits, never notice the misses and attribute your successes to knowledge or technique rather than luck. Second, in a bull market people are desperate for any “sure thing,” no matter how harebrained it is. She was an obvious quack with no real investment knowledge. While less extreme than Evangeline, other quacks are ever-present. There is never a decade when major quacks don’t find some success in the popular press predicting the ups and downs of Wall Street—and always with an extreme, dramatic flair.

Finally, Evangeline could be seen as the mother of astrology as it is applied to the modern stock market. It is hard to imagine anything sillier, but remember your P.T. Barnum—there are always plenty of suckers. Even today there is a small contingent of quacks successfully peddling useless investment services to the public via astrology. Some people never learn.

ROBERT RHEA

HE TRANSFORMED THEORY INTO PRACTICE

Robert Rhea took an unrefined Dow Theory and whipped it into an updated, defined, and systematic guide to the stock market, sparking theory into practice. In doing so, he converted Charles Dow’s rather abstract ideas and William Hamilton’s applications into “a manual for those wishing to use it as an aid in speculation.” When he died in 1939, he left an accessible theory and devout Dow descendants to continue his legacy.

Born in Nashville in 1896, Rhea had a father who owned a Mississippi River boat line, loved the stock market and went boom and bust several times. While still in school, his father handed him Hamilton’s dense Wall Street Journal editorials and told him “to master them or get spanked.” Though no easy task for a teenager, young Rhea eagerly complied!

After a short college stint, he followed in his father’s footsteps, starting his own river boat line, which nearly sank his old man’s. Rhea kept his profits stuffed inside his pants pocket until dad advised him to send the cash to Wall Streeter (and author) Henry Clews for safe stocks. In return, Rhea received 10 shares of U.S. Steel, bought at 14—and he was hooked on the market just like his father, regularly eyeing his stocks in the WSJ. Next, he caught some bad luck—i.e., tuberculosis—but recovered enough to enlist in the Air Corps in 1917, only to have his airplane crash. The crash caused a piece of propeller to pierce his lung, leaving Rhea bedridden, an invalid, for life.

Where most people’s lives might have ended here, Rhea’s just began. Basing himself in Colorado Springs, he researched economic trends as his only form of recreation, “offsetting the pleasures enjoyed by more fortunate men.” He worked so intently, he found he forgot his pain, and was so tired at the end of the day that he could sleep more easily at night. Through exhaustive studies of the Dow’s action, Rhea theorized the Dow was the only reliable method of forecasting market movement—a theory he felt was worthy of his life’s attention.

Rhea’s bedroom became a veritable statistics factory as he churned out averages and constructed Dow charts, which became vitally important to traders adhering to the Dow Theory. Rhea himself dabbled in the 1920s bull market, basing his buys on his chart with generally good results. He later recalled: “Either the Dow theory or just plain luck caused me to buy a few stocks at the proper time in 1921 and prevented my owning any during the final stages of the 1929 uprush. Moreover, either the Dow theory or luck caused me to carry a short account of small proportions during the two years after the crash. Thus my study has paid dividends. . . .”

By the late 1920s, he was a highly regarded Dowist. So, when Hamilton, the current Dow expert, died a few weeks after predicting the 1929 Crash, Rhea replaced him as the “high priest” of the Dow Theory. Barron’s published some of his “notebooks” that year, but people pined for more. Rhea then penned The Dow Theory, which was at first panned by publishers. When no one would accept his “white elephant,” he published it himself in 1932. The book is Rhea’s most famous work, selling an astounding 91,000 copies in its first six years.

Rhea’s fascination with and sheer awe of Dow and Hamilton are reflected in the book, which includes Hamilton’s 252 WSJ editorials that initially gave form to Dow’s ideas. Handling the theory with kid gloves, Rhea made a point of protecting it from the scorn of unlucky speculators. “Perhaps the greatest danger in the application of the theory to speculation in stocks lies in the fact that the neophyte, having beginner’s luck, may arrive at correct conclusions several times and then, thinking that he has discovered a sure method of beating the market, read his signals the wrong way. Or, what is even worse, he may be right at the wrong time. In either of these events, the Dow theory is usually blamed, when the fault lies within the trader’s impatience.” (Actually, this type of disclaimer—the old don’t-blame-the-theory, blame-the-interpretation line—became a sort of motto for modern technical analysts like John Magee every time their forecasts were off.)

Rhea never said practicing the Dow Theory was easy—it just took a little patience and a lot of understanding. “The Dow Theory, like algebra, is not readily understood after a mere casual reading of a textbook on the subject.” Nor is it “an infallible system for beating the market. Its successful use as an aid in speculation requires serious study, and the summing up of evidence must be impartial. The wish must never be allowed to father the thought.” He felt any trader with ordinary market sense and the experience of having gone through a complete market cycle should be able to succeed 70 percent of the time. A few points Rhea suggested remembering when testing the Dow Theory are:

1. They profit most from Dow’s Theory who expect least of it.

2. The Theory is no sure method of beating the market, and no such theory or system will ever be devised.

3. Trading based upon an impartial reading of the averages as implied by the Theory will net frequent losses, but gains will outnumber them to a reasonable extent.

4. Do not try to work the Theory too hard.

5. Do not try to inject innovations until they have been tested over the 37-year record of the averages.

6. Do not try to trade with thin margins and Dow’s Theory at the same time.

7. If the Theory is worth following, then study it—learn to form independent opinions, checking them against those of others who have learned to use Dow’s methods through several bull and bear cycles.

8. Do not allow your position in the market, or current business statistics, to influence your reading of the averages.

Apparently enough people were willing to try it out, as fan mail piled up at the foot of his bed. Before Rhea knew it, he had a loyal following for his advice. Unable to answer the letters individually, he sent out notices in the mid-1930s saying that if and when he had anything to say to his public, he’d mimeograph it and send it to whomever wanted it. But he didn’t say it would be free. By 1938, his bedroom was bustling with 25 assistants who helped him churn out Dow Theory Comments to 5,000 subscribers, each shelling out $40 per year. Dubbing himself the Dow Theorist, he appears to have decided to capitalize financially on his position as heir to the Dow/Hamilton legacy.

Like Hamilton, Rhea had a few successful calls, such as predicting the bottom of 1932’s bear market within a few days and forecasting the 1937 bear market and 1938 bull market. But Rhea’s public career in terms of continuous investment advice offered in his newsletter was too short to really measure his efficacy. His health was lacking. He was down to the use of one lung and had heart problems, finally dying in 1939 at age 52. His relatively large circulation base came to him in a hurry, yet received his commentary for only months.

In some ways, a little like Marilyn Monroe or John Kennedy, Rhea’s image became enhanced by his early death. Had he lived and stubbed his toe in public through continuous advice, the Dow Theory approach might have faded fast, but his death left his record in an unassailable position, and for decades investors would take the Dow Theory more seriously than they now do; even today it receives no inconsiderable attention. Just before he died, he turned the newsletter over to a junior partner, Perry Griner, who continued the Dow Theory legacy by promoting the concepts of Dow, Hamilton and Rhea. But unlike Rhea, Griner and subsequent Dow Theorists were never able to push the concept into new territory or make it bigger or more powerful than it had been before. The fact that folks have read Rhea and followed the Dow Theory for 50 years after his death is a testimony to him and clear evidence of his impact on the market.

Yet, at the same time, he was a newsletter writer who was never really proven over time. The folks who have picked up his banner over the decades have had no shortage of material to work with, and Dow Theory as interpreted by Rhea is now accepted as a fully applicable theory. Sadly, their advice hasn’t been as rewarding as Rhea might have hoped. Perhaps the same fate would have followed had Rhea lived and been able to stub his own toe. While the Dow Theory has moved and shaken a lot of people and markets over the decades, the test of a theory lies in how well it transfers from practitioner to practitioner and decade to decade. By this standard, Rhea’s work didn’t quite meet the market. In recent decades, in my estimation, the Dow Theory people have done truly terribly, often making very backward market calls.

Rhea was one part visionary, refining Dow’s and Hamilton’s ideas. He was also part newsletter writer and, the subscribers to his newsletter legacy, as with most newsletter subscribers, haven’t gotten one iota out of it in my estimation. The big benefit always goes to the writer, which brings us to the lesson of Rhea’s life—writing about the theory in periodicals and books and making it generally available, empowers the reader. Authors of financial periodicals and books get darn little money from it—only prestige, respect and name recognition—and only to the extent they give their readers something to use on their own when they put the page down. But newsletter writers typically sell conclusion and entertainment and get lots of money for it. They typically don’t empower the reader to continue on his or her own way. Be skeptical of newsletters because few if any are worth their high prices.

IRVING FISHER

THE WORLD’S GREATEST ECONOMIST OF THE 1920S, OR WHY YOU SHOULDN’T LISTEN TO ECONOMISTS—PARTICULARLY GREAT ONES

Economist Irving Fisher left an abundant amount of work in mathematical economics, the theory of value and prices, capital and monetary theories, and statistics. Indeed, it seems almost as if he were touted as one of the great economists simply because he had a lot to say. He wrote at least 10 major books and taught at Yale for over 35 years. But credentials don’t always mean you’re right. In fact, in Fisher’s case, credentials allowed him to be wrong in a number of his major hypotheses—like the 1929 Crash—and then spring back with revised jargon after the fact. Clearly, Fisher’s greatest contribution to Wall Street was his own negative example which should stand as a permanent warning to all concerned with financial markets and economics to steer clear of what economists have to say. Since Fisher’s day all kinds of studies have demonstrated that economists are wrong more often than right.

During his lifetime, Irving Fisher, who died at 80 in 1947, campaigned for scores of issues—both economic and social. He was known as a social philosopher, crusader, teacher, inventor and businessman. He was an advocate of fanatically strict health and hygiene rules, Prohibition, world peace, and eugenics (which is a kind of racist notion of societal self-improvement through genetics). He explored econometrics, probably knowing that the easiest way to gain recognition is to explore a brand new field. Fisher even got to schmooze with five presidents, so that he, in a Bernard Baruch-like way, promoted himself by becoming known as an adviser to presidents. Fisher liked to indulge in self-acknowledgment and built up his credentials to make it easy.

In the world of economics, he is most noted for his early work in monetary theory, which has more recently been replaced by monetary theory from “the Chicago School” of economists. It is often ironic to Wall Streeters that Fisher is still held in high regard by economists and economic historians. Wall Street historians often see that as a form of condemnation of economists and economic historians, proving they don’t know anything. Fisher clearly didn’t when it came to forecasting. And if an economist can’t forecast correctly, what good is he?

His biggest blunder, beyond a doubt, came with the 1929 Crash and ensuing Depression. Fisher spent many evenings in 1928 preaching permanent prosperity and never once saw the Crash coming. He even denied it as others started predicting it, as pointed out in a satirical Outlook Magazine article. On September 5, 1929, Fisher asserted stock prices were not too high and insisted there would be no crash.

“There may be a recession of stock prices, but not anything in the nature of a crash . . . Dividend returns on stocks are moving higher. This is not due to receding prices for stocks and will not be hastened by any ‘anticipated’ crash, the possibility of which I fail to see.” In October, he countered Roger Babson’s insightful doom-and-gloom prediction with the claim that the market had reached a permanently high plateau. About a week before the Crash, when the market started to sputter, he dismissed a sharp break as a “shaking out of the lunatic fringe that attempts to speculate on margin.” Perhaps it was he who was on the lunatic fringe.

On October 23, Fisher found the “public speculative mania” to be the least important reason for the long bull market. He still refuted Babson’s expected 60 to 80 point drop in the Dow Jones barometer, unless it was accomplished by shakedowns of 5 percent to 12 percent, followed by recovery. (The Dow Jones later showed a 48 percent decline!) When his blunder became quite obvious after Black Thursday, Fisher would sometimes attempt to rationalize it by saying others had been equally misled. Modern economists run the same number. If they are all equally wrong, they consider themselves justified by each other.

Shortly after the Crash—but long before the market continued over the cliff in 1930 and bottomed in 1932—Fisher quickly penned The Stock Market Crash And After, gathering up all his goofs in one embarrassingly obvious, tidy collection. It is one of the best reads ever because it shows how completely bass-ack-wards-wrong the world’s leading economist(s) can be. It is a marvel in rationality by negative inference. You learn from it what never to believe (and you can find it in major libraries).

Fisher’s book detailed a glorious vision for the immediate future in chapters such as, “The Hopeful Outlook,” “The Dividends of Prohibition” and “Remedies and Preventives of Panics.” He listed government and private “remedies and preventives of panic” that together would help save the “market from further disaster.”

Fisher even went so far as to call the 1930 depressed stock market “one of the most wonderful bargain-counters ever known to investors.” He claimed that “in spite of the tremendous harm that has been done to common stocks during the panic of 1929, investment trusts have made it safer to invest in common stocks than ever before.” He concluded his book by saying, “For the immediate future, at least, the outlook is bright.”

Fisher could not have been more wrong, and soon the immediate future grew very dark, especially for his own personal finances. Unfortunately for him, he followed his own advice! He wound up losing forever the fortune he had made from inventing a visible card index system. He did so by investing his last million in Remington Rand stock after the Crash. He bought the stock on heavy margin for $58 per share, thinking he was getting an amazing bargain . . . later, it plunged to $1, and he lost his shirt.

Fisher never recovered financially and constantly had to borrow money from his family until the day he died—quite a testimony for the guy supposed to be the world’s greatest economist. On his deathbed—after getting swindled for the last time by an obvious con artist—Fisher likened himself to a shoemaker who made fine shoes for everyone except his own barefoot family.

His son, Irving Norton Fisher, wrote a 1956 biography of Fisher, My Father, Irving Fisher, and in it, rather comically plotted his father’s wealth by the cars he drove. In the early years, there were a Dodge and a few Buicks. When finances soared, there was a chauffeur-driven Lincoln, a swank La Salle convertible, and a Stearns-Knight. When the market hit rock bottom, wiping out Fisher’s finances for good, the hot cars disappeared and a Ford reappeared. His last car was a used Buick bought in 1938!

With gray hair, a mustache and goatee, and round spectacles, Fisher looked the part of the intellectual. Born in 1867 in New York’s Catskill Mountains, Fisher was the son of a Yale graduate and minister. He worked his way through Yale as a tutor, earning in 1891 a Ph.D. in economics—the first doctorate in pure economics ever awarded by Yale. Two years later, he married the daughter of a wealthy Rhode Island family and began writing furiously. When folks marveled at the amount of work he churned out, Fisher said he simply followed his formula: Delegate what can be delegated and stay healthy. He became completely paranoid about his health after contracting tuberculosis in 1898. After recovering, he avoided tobacco and alcohol, followed a regimented diet, and became obsessed with the Prohibition movement—perhaps further proof as to why you shouldn’t listen to economists if you want to make money in the financial markets.

Times change. Big names come and go. Technology evolves, and society grows bigger. Americans grow ever more prosperous each decade. And economists keep forecasting. “Often wrong but never in doubt,” economists are injurious to your financial future. Folks tend to believe their forecasts, which are rarely correct, particularly at important turning points. Irving Fisher was the first of the big name economists to be taken seriously by the marketplace and the first to blow it in public. He started a trend. The markets have listened to and then rejected a never-ending stream of economic witch doctors ever since. Personally, I’m always embarrassed when folks ask me if I’m related to Irving Fisher. But I’m always proud to say no.

WILLIAM D. GANN

STARRY-EYED TRADERS “GANN” AN ANGLE VIA OFFBEAT GURU

William Gann looked to the stars—via astrology—for the calm, focused, and meditative frame of mind he needed when studying the stock market. His complex and New Age-like trading method, concocted in the 1920s, demanded undivided attention, as it was based on a hodgepodge of mathematics, philosophy, mysticism, and the laws of nature. While many Wall Streeters found Gann’s system too weird for their liking, this author included, he has long been a guru to offbeat market traders, almost always technicians, who feel themselves truly connected to the inner workings of the market through Gann’s teachings. Feeling free of the conventions of both fundamental and technical analysis, Gann’s followers continue, 35 years after his death, to giggle and mutter Gannisms, and glance back and forth at each other with that we’ve-got-a-secret look that is almost cultish.

Born in 1878 the son of a Lufkin, Texas cotton rancher, Gann grew up respecting cotton and other commodities markets. After making his first trade in cotton futures—and winning—his curiosity, open-mindedness and knack for math led him to the stock market at age 24. Within a few years, he was well known in Texas; local papers even published his cotton forecasts. But looking to the stars even then, Gann left his home for New York and a larger audience in 1908.

Operating from his Wall Street office, Gann made a modest splash working as an analyst, stock market letter writer and stockbroker until 1919. So, he was at least part salesman, which is important to note as you watch the progress of his life and the image that developed around him. In 1919 he began his own advisory firm, put out his own newsletter called Supply and Demand, operated a chart service, researched markets and began writing his first of eight books that would make him a cult figure in Wall Street. Organized, dedicated and thorough, he published Truth of the Stock Tape in 1923, followed by Wall Street Stock Selector in 1930, which laid the foundation for his system.

The Gann Theory primarily identifies the best times to buy and sell by determining major and minor market trends and pinpointing where changes could occur. In formulating his theory, Gann relied on the re-enactment of the past, feeling that time changes but people do not. “Times and conditions change and you must learn to change with them. Human nature does not change and that is the reason history repeats and stocks act very much the same under certain conditions year after year and in the various cycles of time.”

Among his “Rules for Trading in Stocks,” as listed in his 1949 work, Forty-five Years in Wall Street, Gann urged investors to determine the trend of the Dow Jones via his other rules. Once the trend is established, he suggested buying and selling three weeks into an advance or decline and on five to seven point moves. (Note that five to seven point moves then, when the Dow was at 175, were much more material than today with the Dow at several thousand.) After buying a stock, to reduce risk, Gann repeatedly reminded the reader to place a stop loss order 1, 2, or 3 points below its cost. “When you make a trade you can be wrong,” he says, and a stop loss greatly reduces risk.

In another trading checklist of 24 “never-failing” rules, Gann suggested the following:

1. Divide capital into 10 equal parts and never risk more than a tenth of it on any one trade.

2. Never overtrade.

3. Never let a profit run into a loss.

4. Do not buck the trend.

5. Trade only in active stocks.

6. When in doubt, get out, and don’t get in when in doubt.

7. Never buy just to get a dividend.

8. Never average a loss.

“Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature because mathematical principles of the highest order lie at the foundation of all things,” Gann said. He was a numbers guy—obsessed with mathematical relationships and ancient Greek, Babylonian, and Egyptian mathematics. Gann claimed he could pinpoint early trend reversals on the basis of his hundreds of charts—daily, weekly, monthly, quarterly, and yearly charts—for stocks and commodities from 1900 to 1955. His charts revealed a bull market was coming, for example, when prices rose, leading to a pull back and another rally, which then formed a higher bottom than the previous one.

At the heart of Gann’s intellectual contribution to Wall Street is the notion of Gann “Angles” which are constructed to measure “support and resistance lines” and to determine trends. There are few heavy traders who don’t pay attention to Gann Angles, either because they believe in them, or because they know that so many other traders believe in them. If a Gann Angle is crossed, it might generate a “crowd” reaction among traders. Gann Angles are based on the theory that time is as important to market movement as price. This is somewhat similar to the teachings of R.N. Elliott. The actual techniques of constructing Gann Angles are relatively complex to describe, but easy to do, and can be accomplished with nothing more than paper, pencil, a simple ruler, and very simple math—enhancing their appeal to a large mass of followers.

Technically, this whole notion is seriously flawed (as is the work of Elliott) by the fact that all Gann’s stock market efforts were aimed at forecasting major moves in the Dow Jones Industrials. Anyone who has really studied how a price-weighted index like the Dow works knows that you can’t make accurate forecasts for any price-weighted index without being able to forecast future stock splits—which most of these people never even think about because they don’t think about how the index works. However, there are often periods when there are no stock splits within the Dow, and when this is the case, Gann’s concepts might apply. Whether or not Gann Angles have any validity, many traders believe they do and they are an ever-present concept among the minds of traders both on the stock exchanges and the commodity markets.

Thin-lipped and stern-mouthed, with a sharp nose and oval spectacles, Gann, always clad in spiffy duds, was intrigued with people’s attitudes and behavior towards the market. In his books, he preached his own market etiquette: “Do not trade or invest if motivated by hope, greed or fear. Always be in a good frame of mind . . . Pay close attention to your health . . . Take a lot of time off.” He felt time off was crucial. Actually, that sentiment is quite common among technical traders. “If things are going well, take a nice, long break . . . Go on a vacation if you can. If things are not going well, then this is another reason to stop everything and take that break or vacation. But, when you get back, study as hard as possible.” He took his own advice, wintering in Miami and finding inner peace through astrology.

Aside from his moral stance and far-out connection to the stars, Gann was pretty run-of-the-mill personally. A fellow of the Mark Twain Society, he lived well, but often pinched pennies, presumably saving it for his family after his death. He wasn’t particularly generous: He only gave after having been given. Some say he was simply cheap—stingy. Once, while mowing his lawn with an electric mower, he ran over the extension cord and severed it. Not being a handyman, he had an associate fix the cord and, in return, told him, “I know you’re long on soybeans. You’d better be out of them before the close today.” From that point in 1948 on, soybeans were on a steady decline, for the next 25 years. Did that really happen? Who knows? It is all part of the unprovable Gann legend built on spectacular public market calls, his ability to promote himself and the market’s insatiable need to have a guru who really “knows.”

It is the combination of these three that made Gann. He had no provable public record of accomplishment in the market the way a T. Rowe Price or Ben Graham did. His actual market performance is quite obscure, so no one could really prove he was or wasn’t a great market tactician. His followers are people who are ready to take him on faith. He published and promoted his books and newsletter; en route he built the legend of his perfect market calls. To do so, he probably knew he needed obscurity to hide the imperfections that plague even the best market timers. Yet to folks who need a holy grail to trade the market, Gann is perhaps still today the most holy of the holy. Few aggressive traders haven’t studied Gann, and while the realm of Gann devotees is not limited to quacks, almost every quack I’ve ever seen has Gann in his quiver of quackisms. While Gann’s mathematical methodologies are quite primitive by modern computer driven standards, they still feel good to the trader who works with paper, pencil and calculator and wants to follow only a relatively few number of indicators. They are particularly exotic and mystical to those looking for a magic key to unlock the wealth of Wall Street—and there is never a shortage of people looking for just that.

Unfortunately, Gann’s writings bear the telltale tag of the self-promoter. Far from humble, ever bragging, never copping to mistakes, his writing sounds very much like the earlier version of the modern self-promoting newsletter writer. He claimed, for example, that he wrote not because he wanted the money or the glory but because folks begged him to, and because he wanted to “give to others the most valuable gift possible—KNOWLEDGE.” The style and motivation seem phony to this long-time author.

Gann retired from serving clients in 1946—44 years after he went into the business, but didn’t quit trading until 1951. He died four years later at age 77 in Brooklyn, leaving behind his wife, son, and three daughters. It is unclear how much money he left. Gann fans maintain he was fabulously wealthy when he died—all based on his market profits. Skeptics scoff and ask for proof and they see whatever money he had as coming from clients who were suckered in by his PR. This author has no way of knowing for sure whether Gann was truly what his devotees believe him to be, or a quack. Perhaps he was something in between—a heavily self promoting self-seller who had some skill and intuition and was a good—but not great—Wall Street “outsider.” Regardless, merely by the size of his rather underground-like following of fans fully 35 years after his death, and the degree to which Gannisms still flow out of trader’s mouths, Gann qualifies among the 100 Minds That Made The Market.

WESLEY CLAIR MITCHELL

WALL STREET’S FATHER OF MEANINGFUL DATA

Wesley Clair Mitchell was anything but your typical dime-a-dozen economist who constantly makes superfluous, inaccurate forecasts and does whatever it takes to get media attention. Just the opposite, modest Mitchell stayed behind the scenes of the economic world, working hard to provide the numbers and facts which were previously unavailable—yet needed—to decipher the economy. When he died in 1948 at 74, he left behind a legacy of index numbers and statistical information gathered by the National Bureau of Economics Research (NBER)—which he helped organize in 1920. Today the NBER is the official body that determines when recessions have begun and ended.

To the economic community at large, Mitchell may best be known for his life-long, exhaustive research on business cycles, which formed the basic business cycle model used by macro-economists even today. Where others put forth pretentious explanations and verbose hypotheses, Mitchell backed his theories with cold, hard figures. Ultimately, in his 1913 landmark book, Business Cycles, he was the first to realize business cycles weren’t natural, but systematically generated by-products of the capitalist system. Because of his work, “business cycles” became a common phrase—replacing “commercial crises”—and the financial community came to appreciate the ebb and flow of our economy and the degree to which much of it could be quantified and measured.

Born in Rushville, Illinois in 1874, the eldest son of a country doctor and farmer, Mitchell joined the University of Chicago’s first class. Here, he was surrounded by intellectuals like fruitcake economist Thorstein Veblen and pragmatist philosopher John Dewey, who—together—had a profound impact on Mitchell’s thinking. He worked on his father’s farm during the summers. In 1899, he earned his doctorate, summa cum laude, and the following year, began his academic career at his alma mater. Throughout his life, Mitchell also taught at the University of California at Berkeley and Columbia University and helped found the New School for Social Research in Manhattan. Despite his impressive credentials, Mitchell never truly dedicated his life to academics—it always came second to his economic research.

Relentlessly driven, forthright and methodical, even when recording daily events in his diary, Mitchell always said he’d “rather be at work than to be talking about it.” But with his occasional free time, Mitchell was surprisingly flexible—he’d read a mystery book, work with wood, write letters, go camping, and climb mountains with his wife. A family man. he loved playing with his grandchildren.

“Clair” to his friends and family, Mitchell was first and foremost an economic toolmaker, inventing the technical instruments needed to conduct massive research projects. His statistical expertise set a new standard for analyzing mass observations over time. His charts and tables, which showed an economic society in action, set a new standard for presenting results. His obsession with index numbers stemmed from his belief that they provided detailed information on price fluctuations; very important to Wall Street.

Mitchell was less an economic hypothesizer than a tool vendor. Before him, there was very little in the way of index numbers for a Wall Streeter to look at when considering the economy’s impact on the market—few economic analysis tools available to Wall Street about Main Street.

His numbers spoke for themselves and carved the foundation for the interplay of economic and financial thinking that would underlie the works of economists like Irving Fisher, John Maynard Keynes and all our modern economists—the realization the stock market itself is a powerful leading economic indicator. Without Mitchell and his work, all “top-down” investment managers would operate radically differently than they do today. (Top-down managers comprise most of the financial players today; they assess the economy, then use those conclusions to assess the markets and decide what stocks to own.) Mitchell was fundamental to all subsequent economic and top-down financial thinking. Without him, it wouldn’t exist.

Were it not for the National Bureau, Mitchell’s advances in economics might not have been recognized as widely as they were. Upon its inception, Mitchell regarded the Bureau as an experiment where he could live his dream—“a program of critical research.” During the 25 years he served as its director, organizing an enormous database of statistics on the American economy, Mitchell and his staff centered their research around long-term problems like the nature and causes of business cycles; the measurement and analysis of national income, and the sources and processes involved in the formation of capital. Results were presented in a no-nonsense fashion—without “convenient rationalizations.” Rather, Mitchell assumed the role of instigator. His work would consistently lead to more questions and, in turn, more research.

His work was never-ending. After World War II, for example, Mitchell lobbied to preserve the statistical work gathered and to further new research started during the war. Three days after the Armistice, he boldly requested not only to retain his small staff, but also to hire a dozen more staff members to capture the knowledge regarding price movements that were then flooding the economy.

Rosy-cheeked, yet stern and serious looking, Mitchell spurred the economic community into furthering his intense quantitative research, replacing untested generalizations with verified knowledge. We can thank Mitchell for what we know today about national income, prices and price series, investment, money markets, and business cycles. Just as Charles Dow and B.C. Forbes demonstrated the importance of news information in the investment process, Mitchell demonstrated the importance of overview information in the investment process. Without “Clair” Mitchell, we would know little today about Wall Street’s ties to Main Street.

JOHN MAYNARD KEYNES

THE EXCEPTION PROVES THE RULE I

Countless sources praise the father of post-Depression economics, John Maynard Keynes, and his keen comprehension of the capitalist system. But perhaps the best example confirming him as the dean of economists lies in his little-known personal investment record—namely, in securities markets, where he speculated successfully for about 40 years. Rather than relying on insider information, “hot tips” or market-timing devices, he had his own quirky system that basically defied whatever the mass populace was up to at the time. A contrarian in temperament as well as in the market, Keynes relied on courage and self-confidence to win himself a bundle, boost the world’s faith in stock markets during the 1930s and 1940s, and prove himself the exception, rather than the rule.

Sure, other economists have tried to apply their beliefs and predictions to the market but, for the most part, professional economists have been worse than terrible in trying to deal with the financial markets. When I was a college kid, I was vastly impressed by Milton Friedman’s philosophy that the test of a social science was whether it was able successfully to predict the future. That made and makes sense. On this basis, economists, as a group and consistently within the group, get an F- for a grade. Strangely, the world keeps listening to economists and their forecasts but, as per Irving Fisher, they’re just terrible at forecasting and, more importantly, at predicting financial markets.

But Keynes succeeded where other economists always failed: He made a killing in the years following the Crash. By contrast, the leading economist of the 1920s, Fisher, blundered time and time again in the market, most notably during the 1929 Crash and Great Depression, losing everything he had and living the rest of his life on money borrowed from relatives.

Born in Great Britain in 1883 to an intellectual and cultural family, but a modest one just the same, Keynes started dabbling in securities in 1905 at age 22. Fourteen years later he became a serious operator—self-taught, speculating in foreign exchanges with good results. In 1920, however, he lost it all—including funds family and friends had entrusted to him—when the tide turned and the currency markets went against him. But by then he was hooked to the game.

Keynes quickly took a loan from a friend and an advance from one of his early works, The Economic Consequences of Peace, and plunged deeper in the same positions that had just wiped him out! Within two years, he paid back his “moral debts,” and went from over 8,500 pounds in debt to over 21,000 pounds in profit. By 1945, the year before he died, he had amassed the equivalent of about $20 million in 1990 purchasing power. That’s an annual compounded growth rate of 13 percent during a time when inflation was practically nil, so that the real rate of return was really quite high on a sustained 25-year basis. Few investors can match his record over those years.

Keynes refused to say he had a “strategy,” but instead claimed, “My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.” Later, in 1938, he put forth “that successful investment depends on three principles:

1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time.

2. A steadfast holding of these fairly large units through thick and thin, perhaps several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake.

3. A balanced investment position, or, a variety of risks in spite of individual holdings being large, and if possible opposed risks (e.g., a holding of gold shares amongst other equities, since they are likely to move in opposite directions when there are general fluctuations).”

Keynes’ typical portfolio consisted of large holdings in just four or five securities, going directly opposite to the old assumption that you should “never put all your eggs in one basket.” He once wrote to a colleague, “You won’t believe me, I know, but it is out of these big units of the small number of securities about which one feels absolutely happy that all one’s profits are made . . . Out of the ordinary mixed bag of investments nobody ever makes anything.”

In 1931, for example, Austin Motors and British Leyland represented some two-thirds of his holdings. While some might have looked upon this as terribly risky, Keynes felt confident in knowing that he knew more about each of his few stocks than he could have known had he invested in a rainbow of securities. Knowing all about your securities, he said, was the best way to avoid risk in the first place. “I am quite incapable of having adequate knowledge of more than a very limited range of investments. Time and opportunity do not allow more.”

Unlike Irving Fisher, Keynes used his techniques to make a killing during the Depression. In the years between 1929 and 1936, when many operators called it quits, he multiplied his net worth by 65 percent via stocks that sold at bargain prices. That wasn’t too hard to do: You just had to be calm and cool enough to roll with market fluctuations and not panic. For example, in 1928 he owned 10,000 shares of Austin Motors at 21 shillings apiece. The following year, they were worth five shillings, but Keynes refrained from selling until the next year, when he was able to sell 2,000 shares at 35 shillings each! He also found a bargain in the big utility holding companies, which bottomed out in the mid-30s after utility magnate Samuel Insull’s empire collapsed. Sald Keynes, “They are now hopelessly out of favor with American investors and heavily depressed below their real value.”

Perhaps the most contrarian aspect of Keynes’ operating style was lever-aging his portfolio to the hilt; this meant death to many speculators during the Depression. In 1936, when he was worth over 506,000 pounds sterling, his debts were some 300,000 pounds sterling. In later years, however, Keynes reduced his margin debt: After 1939, it averaged about 12 percent of his net assets, as compared to more than 100 percent in the early 1930s. He used maximum debt when it fit, and in less advantageous times, he didn’t.

World renowned for his classic 1936 work, General Theory of Employment, Interest, and Money, Keynes tried to make use of his revolutionary theory in the market—but he knew it was his uncanny ability to pick quality stocks, rather than his ability to time the market, that made him successful. The market was too unpredictable—yet he used that to his favor. “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”

Standing a formidable 6 foot 1 (with stooped shoulders later in life), with large lips and a mustache, Keynes’ disdain of the public was a product of his aristocratic, intellectual upbringing. Both his parents were professors at Cambridge University in England; his father famous for authoring an early major economic textbook, Scope and Method of Political Economy. Young Keynes attended Eton, then Cambridge—riding on his parents’ coattails. He soon found a place for himself, counting classical economist Alfred Marshall, as well as literary giants like Virginia Woolf, among his circle of friends. A vicious debater, Keynes was known for his candid talk and combative nature when discussing economics. Yet, otherwise, he was soft-spoken, an art collector, a great Lord Byron fan, and a ballet fan—leading to his marriage to a Russian ballerina in 1925.

After Keynes and his General Theory, economic thinking in America and around the world was changed forever in a revolutionary and nonlinear way that no one could have anticipated. But that isn’t why Keynes is in this book of financial market makers. No, there have been lots of folks who were important to economic theory and implementation. But they couldn’t make investments work, and Keynes could. Just as he was a radical in economic theory, his success in the markets demonstrates the fact that only a radical economist could ever be successful in the markets. Therefore, most folks should shut their ears to the utterings of conventional economists on anything that relates to financial markets.

R.N. ELLIOTT

HOLY GRAIL OR QUACK?

Ralph Nelson Elliott, author of the “Wave Principle,” was one of those marginal Wall Streeters rarely heard of while alive. Some 20 years after his death, however, his work was resurrected and adopted as the base investment philosophy for a sprinkling of contemporary promotional newsletter types who declared it a lost treasure, claiming themselves possessors of the lost grail and therefore worthy of attention. There is much in Elliott’s work that is interesting, but there is also enough bunk to prevent it from ever becoming seriously accepted by top money managers. Yet, for a period of time in the 1980s, the Wave Principle seemed to be working in almost uncanny fashion, and it gained credence, primarily among newsletter writers, stockbrokers and business writers. This newfound recognition vaulted Elliott’s otherwise-forgotten theory into Wall Street’s history books and its calculating practitioners into a new school of technical analysis that became wildly popular from 1984 to 1988. Today, the Elliott Wave Principle is again losing ground and its devotees often maintain it is being kept hush-hush—a valuable “secret.”

Since the theorist skirted fame while alive, little is known of him personally. His obscurity argues, although not perfectly, against him. We know he was agnostic and, judging from his work, leaned towards mysticism like William Gann. Reportedly an accountant, Elliott was said to have been a telegraph operator in Mexico before coming down with an illness that forced him to return to his native California. During his three-year recuperation, he was only physically capable of rocking in a rocking chair on his front porch. So, to keep his mind active, he turned to a topic he knew nothing about—the stock market, covering Dow’s work extensively. “Gradually the wild, senseless and apparently uncontrollable changes in prices from year to year, from month to month, or from day to day, linked themselves into a law-abiding rhythmic pattern of waves.” The Wave Principle emerged in 1938 and was published in Financial World, but it attracted little attention, as did its more comprehensive 1946 follow-up, Nature’s Law.

The overall Elliott cycle spans some 200 years and contains cycles-within-cycles ranging in length from the 50-year-or-more Grand Super Cycle, to the 15- to 20-year Supercycle, to the smallest hours-long unit, the “Sub-Minuette.” Identifying the correct cycle depends on forming dozens of charts to visualize the patterns. “To maintain a proper perspective,” he wrote, “the student should chart at least two and preferably more broad averages, using the weekly range, the daily range, and the hourly record, and showing the accompanying volume.” Once the current cycle is correctly identified, investors will see where the market is going next, based on the typical Elliott Wave pattern.

The typical Elliott Wave is complex and difficult to describe without charts and illustrations. In addition, there are multiple nuances in practicing it and plenty of exceptions to the rules. In general, Elliott felt the “cyclical behavior is characterized by two forces—one building up and the other tearing down.” Thus, each sub-cycle consists of eight distinct movements—five upward waves and three downward, called “impulse” and “corrective” waves. Author R.C. Beckman described an Elliott Wave as follows: “Beginning with an upward cycle, Elliott discovered three ascending waves which he called ‘impulse’ waves. Each of the first two ‘impulse’ waves was followed by a down wave which he called a ‘corrective’ wave. The third and final ‘impulse’ wave was followed by a wave which acted to correct the entire upward cycle, and this correction wave itself consisted of two downward ‘impulse’ waves interspersed by one upward corrective wave.” You got that? No sweat—almost no one else did either.

Inherently, Elliott Waves are so subjective and intangible that only the high priest gurus of the religion will lay claim to perfect knowledge of them—and even they argue among themselves. It is very lucky for the modern-day Elliotters that he is long gone, so he can’t be among the arguers. Since it is all very complicated, and most folks will never get a believable handle on the Elliott Wave, it is a perfect vehicle for the purveyors of Elliottness to sell you their knowledge of the holy grail. You don’t have to know all this baloney—just buy their newsletter for $169 a year and be saved. For the resurrectors of Elliottness, it was a perfect theory to sell—nebulous, long-term, (so short-term forecasts can be either accentuated or downplayed relative to the long-term) and, best of all, its creator wasn’t around to argue with them about what it all meant.

Those who adhere to the Wave Principle believe it offers the only consistent explanation of stock market history. Foreseeing continued progress and stock market growth, they claim the theory pinpointed the general rise in stock prices from 1857 to 1929, the setback between 1929 and 1949 and the upsurge between 1949 and 1972. But if it was so great, why then didn’t Elliott’s few direct students bother to continue the tradition; one of them, Garfield Drew, mentioned Elliott’s work on just two pages of his 350-page book!

Critics of both fundamental and technical persuasion say Elliott concepts are stretched to accommodate Elliott conclusions, and the theory itself is confusing and inaccurate. In a Barron’s piece, Steven J. Warnecke blasted the theory out of the water, labeling it full of “misapplied number theory, unclear concepts, conflicting statements and mysticism.” He said a basic conflict within the theory is that it categorizes itself as scientific, yet the charts themselves are open to heavy interpretation.

This author believes Elliott had an interesting but inaccurate idea. Here is the problem as I see it: Technically, the Elliott Wave can’t and won’t work with the indexes available. While it is seldom appreciated, correct index construction is as important to the implementation of a charting-based technical approach as the approach itself. Elliott makes very long range, precise forecasts based on charting single indexes. But to do that you need an index which is internally highly consistent over long periods. The Dow Indexes, for instance, which are the ones most commonly applied to Elliott, can’t work with the Wave because it doesn’t predict stock splits. Any price-weighted index, like the Dow, is so sensitive to stock splits in the intermediate to long-term, that if you have a technical system based on the Dow without the ability to predict splits, it’s hopeless—the stocks themselves, or any portfolio based on them, will behave very differently than does the index. If this happens, what good is a precise forecast? (If none of this makes sense, you might enjoy and benefit from 20 minutes with the “Indicator Series” chapter in Frank Reilly’s wonderful textbook, Investment Analysis and Portfolio Management, published by Dryden Press).

Technically, the only common form of index construction sufficiently stable in the long-run to be compatible with Elliott Wave forecasting is market-cap weighted indexes like the Standard & Poor’s 500. The catch is they aren’t old enough to capture the very long-term historical perspectives in which Wave fans deal.

Elliott was just a guy with an interesting theory that is very hard to apply. Were he still alive, he would be just another market junkie with an oddball approach, as he was throughout his lifetime. To a large extent, the fame of Elliott is due to the fact that he is conveniently dead, so folks can push his guru-ness without him screwing up their marketing of him. Imagine how-many quack religious leaders would be screwed up if Jesus walked and talked among us on a real world daily basis to tell us all where our interpretations of him are incorrect.

The fact is that the financial market is always full of folks selling magic elixirs to naive buyers. This author believes that there is an over-concentration of quack sellers in the newsletter market, but that they exist in almost every part of the financial world, including the supposedly sophisticated large institutional world where academics often dress up unrealistic mumbo jumbo as “academically verified” (one of your basic oxymorons) and then sell it. Elliott provided the financial world with one of its major underground quackisms, and a lot of money has been allocated based on his thinking without much thought on the part of the allocators. We have all heard since we were kids: “You can’t believe everything you hear.” Elliott indirectly teaches us that this slogan has double validity when what we are hearing has a fee attached to it and comes purveyed by a Wall Streeter.

EDSON GOULD

THE EXCEPTION PROVES THE RULE II

Market technician Edson Gould always laughed at the idea of having a significant influence on the stock market, but his predictions were the most precise around. He pinpointed major bull markets and prophesied bottomed-out markets as if he had his own peephole into the future. But in place of a crystal ball and wacky off-the-cuff schemes, his were smart, intensely researched and time-tested theories that made him a legend in the investment community.

A small, shy man, Gould graduated from Lehigh University intent on becoming an engineer, but in 1922 joined Moody’s investment service where he immersed himself in research. He became obsessed with finding the one factor—over and above economic and monetary conditions—that sparked the market. “I carried indices back 100 years and more and soon you discovered that no matter how much you knew about fundamentals, you still didn’t get very accurate stock market answers.”

A Dixieland music lover and a banjo player, Gould first looked for his answer in the harmonics of music, then in quantum physics—with no luck. Finally, he found his answer at the New York Public Library in Gustave LeBon’s 19th century book on mass psychology called The Crowd. “It brought me the realization that the action of the stock market is nothing more nor less than a manifestation of crowd psychology. With this insight, an apparently irrational stock market became comprehensible.” Gould concluded that stocks sell at the price they do “not because of any systematic evaluation of their real worth, but, rather, because of what the mass of investors think they are worth.”

After heading Moody’s economics department through the 1930s, followed by a stint as Smith Barney’s research director, Gould made his niche in writing and began writing a bimonthly market letter called the Wiesenberger Investment Report. In the 1960s, he founded the publication that vaulted him to fame a decade later called Findings & Forecasts with a pricey $500 subscription price tag (the equivalent to about a $2,000 newsletter today) and a scant 2,500 subscribers (the equivalent to about $5 million per year in total annual subscription revenue at today’s value)! Each bimonthly report typically began with an easy-to-read intro, then plunged into technical text accompanied by charts, historical comparisons, statistics and plenty of colorful metaphors. For example, instead of saying the market will rise quickly, he’d use the phrase “jet takeoff.” But no matter how witty the prose, Gould’s cult following clearly worshipped him for Findings & Forecasts’content. His record was uncanny. Just as the market recovered from the sharp decline of 1962, Gould predicted that the Dow Jones Industrials would rise 400 points and the great bull market of the last 20 years would end in 1966. He was right. Then he predicted that Wall Street was in for eight years of trouble beginning in 1966—right again.

Gould’s biggest break came in 1963 when he noted that the bull market of the last 20 years “was a dead ringer for the bull market of the 1920s.” But, although their velocity was the same, the current bull market was lasting three times longer than the 1920s bull market, which lasted eight years. Thus, he predicted, the 1960s bull market would end in 1966—24 years after it started!

More recently, in October, 1972, when the Dow Jones industrial average stood at 940, Gould prophesied it would top 1040 by year’s end—it did so in early January, 1973. Three market days later, on January 16, he whipped up a “special sale bulletin” urging his readers to sell, believing 1067 was the end of the bull market that started in 1970. Within the next two years, the market plummeted nearly 500 points.

How did Gould reach his magical conclusions? He used several tools, including his insight on psychology in the form of his “Senti-Meter.” Calculated by dividing the Dow Jones Industrials Average by the aggregate annual dividends per share paid by the 30 companies in the average, the Senti-Meter is a ratio of stock prices to their dividends—or more simply, “the price investors are willing to pay for one dollar’s worth of dividends.” Gould explained, “The more confident they are, the more they’ll pay; the more worried they become, the less they’ll pay.” I covered this indicator in my second book, The Wall Street Waltz, and it is still an amazingly accurate long-term forecaster, but it doesn’t explain Gould’s shorter-term precision. For that you have to look to crowd psychology.

“Basically, the market is shaped by human emotions, and those emotions haven’t changed in thousands of years,” he firmly believed. In order to prevent his own emotions from shaping his predictions, Gould personally avoided the stock market like the plague. “It would interfere with my objectivity. If I were personally invested, I couldn’t keep my cool when the market was soaring or collapsing.” Sure, he used to invest—but that was way back in the 1940s, when he made money investing in railroad securities. Besides, he said, “for the long-term investor, real estate is probably far better than the stock market!”

Gould, oddly enough, became famous only in his 70s when his new publisher, Anametrics, decided to promote Gould and his surefire forecasts. Operating from a Wall Street office and his modest 35-acre farm in Pennsylvania, Gould kept up his work until retiring in 1983—at 81! He died four years later, leaving behind his wife, two sons, a daughter, a legend and a forecast.

The forecast, first made in November 1979 with the Dow Jones under 850, was for a super-bull market of almost unprecedented proportions. It was issued first as a special report entitled, “The Sign of the Bull” and called for what seemed at the time a wildly over-optimistic Dow Jones Industrial level of 3000 in ten years. Ironically, ten years and eight months after his prediction, the Dow Jones peaked at 2999.75. He is probably smiling from his grave and probably would have called the peak in advance were he still here. One of the very best market timers of all time and the exception proving the rule that no one can time the market, Gould stuck to the major trends, forgetting the little in-between wiggles and jiggles—yet he called major peaks and troughs with amazingly pinpoint precision.

One of the first, if not the first major prognosticator, to call for a super bull market in the 1980s, Gould sadly died a few years short of seeing his most extreme prediction materialize. Long forgotten in a world that mostly remembers recent headlines, Gould’s writings are most significant in that they combine, as few have, the history of what has happened before, fundamental economics and basic crowd psychology. Most market timers tend to favor one of those three factors, or combine them badly. But Gould showed that calm observation of where we are in relation to what has happened before, and what the crowd is thinking, are the keys to market forecasting. His clarity, his sheer simplicity and his vision stand almost unique among market seers of modern history.

JOHN MAGEE

OFF THE TOP OF THE CHARTS

The only relevant figure in the stock market is the stock price, a die-hard technical analyst would tell you. One such person is John Magee, who coauthored the first and what some call the definitive text on technical analysis in 1948, Technical Analysis of Stock Trends. Magee even dared to take a step further, saying it’s possible, though not recommended, for a trader to trade in a stock knowing only its ticker symbol—and nothing else. The trader need not know the company, industry, what it produces or sells or how it’s capitalized.

In keeping with this claim and philosophy, Magee went to great lengths to prevent any bit of fundamental knowledge from seeping into his life. He swore, “I will not be swayed or panicked by news flashes, rumors, tips or well-meant advice.” He read only two-week-old Wall Street Journals (except for the daily quotes), boarded up his office window and operated from Springfield in his home state, Massachusetts, to avoid the business grapevine. Inside his quiet office, the air conditioner hummed and the harsh fluorescent light glared so that it was impossible to figure the time or weather. “When I come into this office, I leave the rest of the world outside and concentrate entirely on my charts. No chance to wander to the window and see a picket line forming. No chance to hear a radio blaring about an auto-production cutback in Detroit.” He was fanatical about keeping his mind free of fundamental contamination, for a clear mind was key to operating the technician’s most fundamental tools, charts.

Technical analysis, as defined by Magee, is “the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in ‘the averages’ and then deducing from that pictured history the probable future trend.” The chart provides all the technician needs to know by illustrating all sorts of formations: head and shoulders, upside-down head and shoulders, right shoulders, necklines, drooping necklines. If he went much lower down the body, things could get really interesting, so he changed to flags at half mast and weak triangles. All of it is pattern and shape oriented. The jargon is baffling, especially to a layperson. The formations determine the main trend, or if and when it might change.

But to call technical analysis a science is deceiving. A science produces a definite number or answer and the ability to predict an outcome with a degree of predictable precision. But charting is open to interpretation, and there’s no sure way to tell which interpretation is right. Indeed, when a technician misses calling a turn, he usually blames it on his own interpretation of his charts—not the charts or methods themselves—leaving technical analysis free of intellectual assault. The benefits of charts, Magee claimed, is that they’re easy to maintain and require only a pencil, paper and the daily stock market quotes. That is an important aspect to the popularity of technical analysis—there is no financial barrier to participating in technical analysis, so anyone can do it.

Personally, Magee bordered on the eccentric. He resembled an absent-minded professor; thinning hair, a crinkled face marked with concentration lines, brown eyes, bushy brows and large ears. He looked like a nerd, was hard-working, regimented and attentive to detail, despite his preoccupied glare. He edited his town paper, Our Home Town, and directed the radio show, “The Voice of Springfield.” Surprisingly, Magee painted abstract pictures for relaxation and even had one hanging in his office—“It keeps the room from being too bare, which in itself could be distracting.” It is hard to conceive that he could have ever allowed himself to have an assistant who was good looking—might be a distraction, heaven forbid. Magee first married in 1928, fathered a son, then divorced five years later. He remarried in 1936 and fathered another son and two daughters.

He maintained daily charts on almost every stock on the New York and American stock exchanges—of course, there were fewer listed stocks then than there are now. It seems he charted everything. Once, while flipping through a binder filled with hundreds of charts of various companies, Magee stopped at one showing a slow-but-consistent downward line, interrupted at intervals by tiny upward spurts. He said to his visitor, author John Brooks, “I don’t know how this one got in the book. It doesn’t show any tactically significant formations, for the very good reason that it isn’t a stock at all. It’s a chart of my weight: I’ve been ordered by my doctor to reduce. As you can see, it’s come down from around two hundred and twenty to a hundred and seventy-five. Those little upturns here and there—those are weekends.” Good thing he couldn’t take regular cholesterol readings or chart his dreams.

Before diving into charting as a career, Magee floundered in all types of fields. Born in 1901 in Malden, he graduated from MIT in 1923, then worked as a sales manager, cost estimator, advertising copy writer, Fuller Brush salesman and account executive. He was running his own mail-order business in cast phenolic plastics in 1942 when he met Bob Edwards, his coauthor and mentor in technical analysis. Edwards was also the brother-in-law of post-Dow theorist and former Forbes financial editor Richard W. Schabacker, who first applied the chart method to individual stocks, instead of sticking to the averages as Dow had done. Schabacker was an intellectual mentor to both Edwards and Magee.

Right away Magee had an “almost hypnotic fascination” with charting, “so I rushed right into the market, and promptly lost most of my savings.” At 41, he became an investment counselor, a market researcher and trader. It is actually amazing that he could have started all this so late in life and made a big enough splash to be worthy of inclusion in this book. In 1953, he succeeded Edwards as senior analyst at the investment advisory firm, Stock Trend Services, for three years and then started up his own firm, John Magee, Inc.

“Next to my charts, operating in the market is what I like most. Frankly, I haven’t done as well with my own investments, over the long haul, as I have with my recommendations to clients, but that’s because of a shaky beginning.” At first, before he succumbed to the power of the chart, he’d sell out his position if the stock started to drop.

Magee taught his specialty in the Springfield adult-ed program for about a decade. He died in 1987 at 86 of heart failure. Before his Big Chart ran out, he wrote, published and illustrated The General Semantics of Wall Street in 1958 and Wall Street—Main Street—and You in 1972. Magee was the dean of technical analysts and singularly gave birth to the process of predicting single stock price action based on charting. There are so many people today commonly engaged in charting stocks as part or all of their investment activity that it would be impossible not to include him in this book.