The earliest known book describing any stock exchange was written in 1688. Aptly titled, Confusion of Confusions, Joseph de la Vega describes stock and options trading (mostly of Dutch East India Company stock) on the Amsterdam stock market through a conversation between Shareholder, Merchant, and Philosopher.
The book is a defining example of how little markets have changed in over three centuries. From the early reference to the game and its primary players to the scheming and manipulation to the influential emotions of greed, fear, and panic, the lessons are old, yet still relevant today.
It starts with a fitting description of stock markets:
…this enigmatic business which is at once the fairest and most deceitful in Europe, the noblest and the most infamous in the world, the finest and the most vulgar on earth. It is a quintessence of academic learning and a paragon of fraudulence; it is a touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster, and finally a counterpart of Sisyphus who never rests as also of Ixion who is chained to a wheel that turns perpetually…
The truth of this paradox becomes comprehensible, when one appreciates that this business has necessarily been converted into a game, and merchants have become speculators. Had the conversion of these merchants into speculators been the only change, the harm would have been bearable, but, what is worse, a portion of the stock brokers have become card-sharpers and, though they are familiar with blossoms, they nevertheless lose the fruit.
And the three classes of players:
Every year the financial lords and the big capitalists enjoy the dividends from the shares that they have inherited or have bought with money of their own. They do not care about movements in prices of the stock. Since their interest lies not in the sale of the stock but in the revenues secured through the dividends, the higher value of the shares forms only an imaginary enjoyment for them, arising from the reflection…that they could in truth obtain a high price if they were to sell their shares.
The second class is formed by merchants who a share and have it transferred on their name. They sell these shares when their anticipations come true and when the price rises… They consider their risk as much as their profit; they prefer to gain little, but to gain that little with security; to incur no risk other than the solvency of the other party in this forward contract; and to have no worries other than those bound up with unforeseen events.
Gamblers and speculators belong to the third class. They have tried to decide all by themselves about the magnitude of their gains and, in order to do so,…they have put up wheels of fortune. Oh, what double-dealers! Oh, what an order of life has been created by these schemers! the labyrinth of Crete was no more complicated than the labyrinth of their plans…
And two types of speculators:
The bulls are like the giraffe which is scared by nothing, or like the magician of the Elector of Cologne, who in his mirror made the ladies appear much more beautiful than they were in reality. They love everything, they praise everything, they exaggerate everything… When attacked by serpents, they, like the Indians, regard them as both a delicate and delicious meal… They are not impressed by a fire nor perturbed by a debacle…
The bears, on the contrary, are completely ruled by fear, trepidation, and nervousness. Rabbits become elephants, brawls in a tavern become rebellions, faint shadows appear to them as signs of chaos.
And the (mis)behavior of the players:
…these stock-exchange people are quite silly, full of instability, insanity, pride, and foolishness. They will sell without knowing the motive; they will buy without reason. They will find what is right and will err without fault of their own. They will assume that the spirit persuades them, but the spirit will sometimes be that of Ahab that cheats, sometimes like that of Saul that rages.
…He who makes it his business to watch these things conscientiously, without blind passion and irritating stubbornness, will hit upon the right thing innumerable times, though not always. At the conclusion of his observations, however, he will find that no perspicacity will divine the game and no science is sufficient here. For as the wealthy people also look for a counter-effect when the tendency is unfavorable, and as the indisposition of the Exchange is cured in the same way as the sufferings of a leper in Asia,…namely, by a poisonous medicine,…unfavorable news need not be regarded as fatal.
Finally, the four principles:
The difficulties and the frightful occurrences in the exchange business…have taught some precepts…
The first principle: Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.
The second principle: Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck.
The third principle: Profits on the exchange are the treasures of goblins. At one time they may be carbuncle stones, then coals, then diamonds, then flint-stones, then morning dew, then tears.
The fourth principle: Whoever wishes to win in this game must have patience and money, since the values of are so little constant and the rumors so little founded on truth. He who knows how to endure blows without being terrified by the misfortune resembles the lion who answers the thunder with a roar, and is unlike the hind who, stunned by the thunder, tries to flee. It is certain that he who does not give up hope will win, and will secure money adequate for the operations that he envisages at the start. Owing to the vicissitudes, many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and innumerable men by chimeras.
Confusion of Confusions
100-Year-Old Investment Advice
The Timeless Art of Investing from 1888
Lessons from a Very Old Book on Market Psychology