Thomas Lawson had a gift. He was stock promoter. He knew how to manipulate stock prices…and people.
He was so good, in fact, that one of his “operations” set off a minor panic at the tail-end of 1904. It was part of his plan.
For several months, Lawson placed ads in newspapers across the country singing the praises of Amalgamated Copper. Its stock price gradually doubled from $40 to $82.
On December 5th, he issued a warning. Half-page ads advised stockholders to sell. The panic kicked off immediately. Over three days, the stock dropped to $58 and by the third day the panic spilled into the broader market.
Lawson devised the entire operation to enrich himself. He already owned Amalgamated Cooper shares when he published the initial ads to drive up the stock price. He sold them all near the top, then he shorted the stock just days before he issued the warning. And he reversed course again, closed the short position, and went long near its lows. A week after the event, the stock had bounced back to $69. Of course, nobody knew any of this at the time.
It was a masterclass in manipulation. So much so, that Irving Fisher used the event to point out the risk of following the crowd and not thinking independently.
The evils of speculation are particularly acute when, as generally happens with the investing public, the forecasts are not made independently. Were it true that each individual speculator made up his mind independently of every other as to the future course of events, the errors of some would probably be offset by those of others. But, as a matter of fact, the mistakes of the common herd are usually in the same direction. Like sheep, they all follow a single leader. How easily they are led is shown by the effect on the stock market in the year 1904, when Thomas Lawson published scare-head advertisements in the newspapers advising the public to sell certain securities.
A chief cause of crises, panics, runs on banks, etc., is that risks are not independently reckoned, but are a mere matter of imitation. A crisis is a time of general and forced liquidation. In other words, it differs from any other period in two particulars, viz, that the liquidations are more numerous, and that they are for the most part forced upon the debtors by the creditors because of threatened or actual bankruptcy. Neither of these conditions could exist unless there had been at a prior time a general miscalculation of the future. Both creditors and debtors must have made a wrong forecast when their ill-fated agreements were entered into. Hence a crisis is the penalty which must be paid when a previous general error in prediction is discovered. Such a general error may be due to the coincidence of a number of independent mistakes of individuals; but it almost always is due to lack of independence — to the principle of imitation. The error, whatever it is, when committed by a person of influence, is like an infection; it is caught by hundreds of others and transmitted to thousands. A great mob of easily led investors, eagerly searching for “straight tips” which may bring instant wealth, make their mistake in common, and when the mistake is disastrous they try, en masse, to escape.
Lawson took advantage of people’s desire for quick riches and used newspaper ads to create urgency and build social proof to manipulate stocks.
FOMO and following the crowd. The mental shortcut prevalent in every bull market is to do what others are doing, especially if what they’re doing is making money.
Following the crowd can create a positive feedback loop. As investors pile into a stock, the price rises, driving more people to pile in.
But the loop is not endless. At some point — we don’t know when — it unwinds. The loop runs in reverse. Usually at a rapid rate, just like it did in 1904 and 1929 and the end of every bull market since.
Irving Fisher pointed to the deficiency in following the herd. The lack of independent thinking is why so many often lose. They lose because they get in late, don’t know what they own or what to do when the investment goes south. They panic sell like everyone else.
Fisher also offered a solution. The best defense against this is to tune out. Tune out the noise, the hype, and the fads that surround every bull market. What everyone else is doing is irrelevant to you. Create an investment plan and follow your own path.
Source: The Risk Element
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