4. IS THE MARKET REALLY A CROWD?

“The crowd always loses,” wrote Mr. Fred C. Kelly in a noted work on the stock market in 1930, “because the crowd is always wrong. It is wrong because it behaves normally.”

What the crowd—or the public—or the market is up to is always a subject of speculation, for the crowd, according to investment mythology, must always be wrong. (The believers in this rule are numerous enough to constitute a crowd, but of course anyone speaking of the crowd believes himself to be outside of it.) In 1841 David Mackay published what is supposed to be the first good book on crowds, Extraordinary Popular Delusions and the Madness of Crowds. Mr. Mackay’s book, said Mr. Bernard M. Baruch, helped him to make his fortune, and one Wall Street investment house sends the book out as a Christmas present. If any of its clients read the book, they probably felt superior, because those Dutchmen who kept bidding the prices of tulip bulbs higher and higher a couple of centuries ago now seem sort of silly. Unfortunately, it is quite possible to read about Dutchmen thinking that the world had an infinite hunger for tulips, and then to go right out and buy some very snazzy computer stock because the world has an infinite hunger for computers. There must always be a rationale, and if the computer rationale is easier than the tulip rationale, it may just be that we do not know the whole story on tulips.

Every investor at some point hears, if only from his broker, that things are still a buy because the crowd has not awakened yet. Is the market really a crowd? Obviously there is no collected mass in the central courtyard chanting Duce or Yankee Go Home. All you have is a ticker tape recording market actions, and a certain number of board rooms all over the country with people watching this movement. There are a far greater number of people who do not even watch this motion but find a few minutes’ sport each morning with the price changes in the paper. Doctors, merchants, lawyers, chiefs—can all these scattered people really constitute a crowd?

At the end of the nineteenth century a French physician called Gustave Le Bon published his Psychologie des Foules, translated as The Crowd. Le Bon spent a good deal of his other writings on generalizations about the characteristics of races, and these have not held up so well, but The Crowd seems absolutely prophetic—in 1895—long before the world knew the kinds of crowds a Hitler or a Mussolini could assemble and manipulate. To Le Bon, a crowd was not merely a number of people assembled in one place; it could be thousands of isolated individuals. These he called a psychological crowd, subject to “the disappearance of conscious personality and the turning of feelings and thoughts in a different direction.” The most striking peculiarity of a crowd, said Dr. Le Bon, was that

whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation.

By this definition we do indeed have at the least the material for a psychological crowd in all those scattered number-watchers. And what, then, do we know about a crowd? The first thing we know, says good Dr. Le Bon, is that an individual in a crowd acquires—just from being in a crowd—“a sentiment of invincible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint.… the sentiment of responsibility which always controls individuals disappears entirely.”

The second element in Le Bon’s crowd was contagion, the communication of feeling—“not easy to explain,” he wrote—and “which must be classed among those phenomena of a hypnotic order.” And the third element in Le Bon’s crowds was suggestibility—“the state of fascination in which the hypnotized individual finds himself in the hands of the hypnotizer.” Once we have dissolved responsibility, we are ripe for contagion and suggestibility and acts of “irresistible impetuosity.”

Plainly, Le Bon did not think of a crowd as something one should spend one’s time in; an individual, he wrote, upon becoming a member of a crowd, “descends several rungs in the order of civilization” because the mind of the crowd is not an average but a new common denominator, mindless in the sense that it has surrendered to its own unconscious impulses. While the crowd would be “intellectually inferior to the isolated individual,” the crowd could be better or worse than an individual, depending on the nature of the suggestion to which it has been exposed.

Is all this really relevant? Remember, we have here a field—securities and their price movements—which is being avidly studied by sixteen thousand rational security analysts, any number of fervent students and graduate students, and a whole slew of computers. Fifty thousand rational brokers—registered representatives, as they are called—dispense information to twenty-six million investors. The whole process is rife with statistics, tables, mathematics, and dazzling reasoning.

And yet stocks that go up do come down again, very smart investors are mousetrapped, and every year some group of stocks heads for the moon with its propellants believing the destination is gold and not green cheese. In 1961 the whole world was going to go bowling, but in 1962 Brunswick managed to make it from 74 to 8 with scarcely a skid mark. In 1965 the whole world was going to sit and watch color television, but shortly thereafter Admiral, Motorola, Zenith, and Magnavox collapsed like a soufflé on which the oven door has been untimely slammed. It will happen again.

The collapse of these groups—and I am sure that of future groups—is marked by a further outpouring of tables, numbers, and statistics. Motorola’s dive from 233 to 98 was punctuated by reports, some of them over one hundred pages long, full of analyses of inventories, total demand, supply, cost structure, discretionary income, and consumer intentions. I still have them in my files. They say—at 212, and 184, and 156, and 124, and 110—that now the stock is a buy. To me these reports are far more illuminating than David Mackay’s essay on the tulip madness in seventeenth-century Holland. All the orders for these stocks, both on the way up and on the way down, go through those brokers, fifty thousand of them, and public madness does not happen all by itself.

There is no substitute for information. The market is not a roulette wheel. Good research and good ideas are the one absolute necessity in the marketplace, and until someone can better define this Australopithecus of a market animal, they will be the best tools. But perhaps there is something else going on here. Let us go back to Dr. Le Bon, although his usefulness is about to veer away from us.

“Crowds,” says good Dr. Le Bon, “are everywhere distinguished by feminine characteristics.” And now we remember hearing Mister Johnson saying that a crowd of men acts like a single woman. (I know one distinguished senior partner who believes that the study of women is the best preparation for the market. It ought to be easy to recruit apprentices for a serious study.) The crowd, says Dr. Le Bon, does not reason, it only thinks it reasons; what it does actually is to accept a series of images, not necessarily connected by any logical bond of succession, and this explains why contradictory ideas can occur simultaneously. The crowd is suggestible to images, and what produces these images is “the judicious employment of words and formulas. Handled with art, they possess in sober truth the mysterious power formerly attributed to them by the adepts of magic.” What Dr. Le Bon has in mind are words like “liberty” and “democracy” and “fifty-four forty or fight,” but perhaps “growth” and “Xerox” will do just as well. All that is necessary is to recognize “the magical power attached to those short syllables, as if they contained the solution of all problems. They synthesize the most diverse unconscious aspirations and the hope of their realization.”

All of this will be no news to many of the players of the Game. Wall Street unconsciously accepts this; the “image” that a company or a stock presents helps its price, and can keep it up long after the rational factors of earnings and return on invested capital have begun to deteriorate. If a company has a reputation for “continuous innovation” or “creating its own market,” that is exotic fuel. The whole process keeps a lot of public-relations firms in business. “Crowds,” says Dr. Le Bon, “are somewhat like the sphinx of ancient fable: it is necessary to arrive at a solution of the problems offered by their psychology or to resign ourselves to being devoured by them.”

Or, as Kipling might have said, “If you can keep your head when all about you are losing theirs, maybe you haven’t heard the news.”

Sigmund Freud was so impressed by The Crowd that he used it as the take-off point for his Group Psychology and the Analysis of the Ego. (I have always like the German title, Massenpsychologie Und Ich-Analyse, because it sounds like Hans and Fritz, the Katzenjammer Kids.) Freud also examines The Group Mind by Dr. W. McDougall, who said that the chief characteristic of the crowd was “the exaltation and intensification of emotion” produced in every member of it. Freud pointed out that this same intensification of emotion occurred in dreams and in children, where the adult repressive tendencies couldn’t get at it.

(If you think Dr. Le Bon was down on crowds, listen to Dr. McDougall: the crowd is “excessively emotional, impulsive, violent, fickle, inconsistent, irresolute and extreme in action.… extremely suggestible, careless in deliberation, hasty in judgment, incapable of any but the simpler and imperfect forms of reasoning.… like an unruly child.”) However, Dr. McDougall’s crowd begins to stray from all our board room watchers, because here we need an organized structure within the crowd and maybe even a rival crowd.

The force in the crowd, wrote Dr. Freud, not surprisingly, is libido, the energy of the instincts that go under the name of “love.” Love here is not only for valentines, it is all forms of love—Eros, the force that holds things in the world together, and hence can also include the devotion to concrete objects and abstract ideas. In Freud’s crowd, the individuals fasten on an object, substitute it for their ego ideal, and all those with the same ego ideal identify themselves with each other in their ego. Remove the object, and you get anxiety. The suggestion is that in the fusing of the ego and ego ideal, “the person, in a mood of triumph and self-satisfaction, disturbed by no self-criticism, can enjoy the abolition of his inhibitions, his feelings of consideration for others, and his self-reproaches.” Freud then goes on into the primal crowd, with the hero leader, and the sons who kill the hero leader, and it gets rather hard to make any neat application. The group, Freud concludes, is the “inherited deposit from the phylogenesis of the human libido.” Don’t worry about it. We are not through with Dr. Freud, but that is all the further he can lead us here.

No one, after these few remarks, will ever want to be part of a crowd again, and yet the fact is that it is really quite comfy to be part of the crowd. (It has to do with individuals being part of a multicellular mass that the commentators on Freud go into and that we need not.) And it is certainly better to be comfy, everybody will agree, than not to be.

Outside of New York there is an aggressive fund housed in pastoral surroundings, run by a man who won’t go into New York. It is not only that he considers New York a sink, which he does, but that “all those fellas ride into New York on the same train and read the same things and talk to each other all the way in.” This captain of money management doesn’t talk to anybody and doesn’t read anything. “All that is all in the price,” he says. “Eighty percent of the market is psychology. Investors whose actions are dominated by their emotions are most likely to get into trouble.” He has a good record, this urbanthrope, but then so do many of the readers, talkers, and riders of the Penn-Central.

There is, one has to conclude, a kind of crowd there, and it is well to be aware of it. If the crowd is so fickle, feminine, and irrational, then does success follow from simply staying out of the crowd? Perhaps sticking to one’s knitting, the rational following of rational choices? Here are the pithy comments of Lord Keynes:

… Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market.… if the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the game-players. But we must also add that there are several factors which jeopardize the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and given equal intelligence, he may make more disastrous mistakes.

That is why, even at the most sophisticated levels, the crowd rationale is heard. “My biggest customer has just taken down a large chunk,” says the salesman, “and I understand on very good authority—don’t tell anyone—that Fidelity is looking very hard at this one.”