John Wooden

John Wooden’s Pyramid of Success
From Basketball to Investing

Investing seems to be a mystery to many people. It doesn’t have to be if you look at investing as a game. Think of investing as a game and remember that corporations have game plans. Structure your game like this:

Your team may be your family or a group of friends. The market is your opponent.

Buying is considered the offense and selling
is considered the defense. For the best results, you should eventually be good at both.

Your investment plan is your play book, which prepares you for both rising and falling markets.

Winning is defined as profits and losing is defined as losses.

Your investment plan is equal to a playbook of strategies for winning. Once you start thinking of investing as game, you can better understand and relate to investing.
When you think of investing like a game, you will realize how important an investment game plan is to your financial success. There are many winning strategies and you will need to decide what works best with your personality and your own financial needs.
Look for the ways that fit your skills and comfort levels. As with most games, you need to control your greed and fear for they are two things that cause people to lose the most.
If you would like to begin to condition yourself for the game, we suggest taking a look at John Wooden’s Pyramid of Success. We have adapted it to investing below.
John Wooden also wrote a book with Bill Sharman (Boston Celtic player and LA Lakers coach), The Wooden Sharman Method, in which they discuss the fact that intensity though hard work and desire will make efficiency second nature. They also write that:

• Decisiveness is a valuable attribute for the execution of fundamentals.

• Each day that you fail to do your best, you lose something you can never get back.

• Patience is important-good things take time.

• When you curb your emotions, you develop poise and self-control, which leads to better performance.
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• The more you let outside factors influence your investment plan, the worse you will do.

• Never let a situation or trade or market get the best of you.

• When practicing, set goals for yourself; it helps gauge improvement.

• When role playing, (i.e., buying and selling on paper), setup scenarios for what can happen.

• Know in advance how you would react to different situations. How would you adjust your plan if some event occurred? The way you practice usually determines how well you execute your real rules.

• Learn to do things you do well and don’t try or minimize things you can’t do well.

• Steady, consistent investing gets the results.

• Talk over your specific plan or trades with a knowledgeable friend of fellow investor. They may find strength or weaknesses in you that you might not recognize.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Thoughts

from

John Wooden’s Pyramid of Success

Faith (Confidence)
• Faith in the future
• Faith in yourself
• Faith in your beliefs
• Faith in your investment program

Patience
The willingness to allow your plan to work; to learn why you made profits and why you had losses.

Reliability
Consistency of returns – small, medium and large gains and occasional small losses.

Adaptability
Adjust your plan as the market changes and as you gain experience.

Condition
Mentally condition yourself to control your emotions in different situations.

Practice (on paper) buying and selling: write down the date and price of your purchase and the price of your sale to see if you would have had gains or losses. Try to learn why you made or lost money so that you can develop a plan and implement emotional disciplines that work best for you.

Learn to use self-control and discipline to follow the plan you developed.

Alertness
• Become aware of the many events that could influence your investments for better or worse.

• Be quick to take any actions needed to keep profits and minimize losses. Don’t procrastinate!

Team Spirit
Sacrifice your ego; be humble.

Resourcefulness
Look for other areas of your life, such as sports or games that can help you with your investment plan.

Develop and judge your own investment procedures with checks and balances.

Initiative and Intentness
Take steps to develop a plan that works best for your emotions, time available and interests and then develop the desire to follow it.

Enthusiasm and Optimism
Enthusiasm for the future and optimism that your plan will work well.

Competitive Greatness
Follow your plan regardless of how great, uncertain or bleak things may look.

Self-Control
• Keep emotions under control.
• Don’t let fear, greed, complacency, arrogance, ego and procrastination influence your plan.

Skill
Gain knowledge of the investment methods that work best for you and develop the ability to execute the written plan you have developed.

Be prepared to carry out your plan that covers every detail in your methods plan.

Industriousness and Ambitions
There are no substitutes for work and being focused on your objectives.

Worthwhile things come from hard work and careful planning!

 

John Wooden

By Marcy Pennypincher

“Success is peace of mind, which is a direct result of self-satisfaction in knowing you did your best to become the best that you are capable of becoming.” – John Wooden

I bet you thought that March Madness referred to the NCAA college basketball playoff series. WRONG! March Madness refers to how MAD wives and girlfriends get when their husbands and boyfriends spend weekends glued to the television for the entire month!

While my husband Mark is busy tracking his favorite teams, I decided to read one of his “recommended readings” Coach Wooden’s Pyramid of Success: Building Blocks for a Better Life, written by John Wooden and Jay Carty in 2005. In 2009, even after Wooden’s death, The Sporting News named Wooden (1910 – 1990) the “Greatest Coach of All Time.”

Coach Wooden is one of just three people to have been inducted to the Basketball Hall of Fame as both player and coach and is known for his teachings about success. Mark raves about Coach Wooden’s Pyramid of Success and says it serves as an excellent road map for both life and investing. I wanted to check it out for myself.

Wooden’s Pyramid of Success is featured on pages 14 and 15 of his “Building Blocks” book. He defines several characteristics that can apply to all of us. The foundation’s cornerstones are industriousness (hard work and careful planning) and enthusiasm (love your work). Other recommended traits include self-control (good judgment, common sense and keeping emotions under control), alertness (be watchful, correct any weakness), initiative (the ability to make decisions and think alone), and intentness (stay the course to reach your goal).

The last characteristic, intentness, makes me think of people I have known who, in recent significant market downturns, liquidated their investments when they were priced at or near the bottom. I can sympathize with them…but Mark says that when the market is “on sale,” and it is time to buy. It helps to be conditioned (mental discipline to stay the course) and have faith and patience in your investment strategy so that you don’t respond emotionally to changes in the market.

 

 

 

 

 

 

 

 

 

 

Wooden’s pyramid includes two building blocks that apply to investing: skill and team spirit. Skill refers to having knowledge, being prepared and covering the details. I know Mark is a fit for the “skill box,” so I feel comfortable relying on his expertise. Team spirit may sound like it applies only to sports, but if you think of it, as relating to putting your ego on hold and concentrating on reaching your goal. Wooden says that having poise (being yourself and not doubting yourself), faith (conviction in your strategy) and the patience (giving your plan time to work) are helpful traits for success.

Wooden’s description of confidence (respect without fear and being prepared) may seem difficult to develop, but as an investor, it’s important to feel confident that you are making an educated investment. If you are a conservative investor, select options that meet your risk tolerance. Remember, however, the lower the risk, the lower the reward. Personally, I can accept moderate risk, but not crazy risk. My goal is to invest in quality dividend paying companies, watch my investments grow and manage risk by creating a balanced portfolio.

 

 

HETTY GREEN

By Naoma Welk

When we think of women in history who have been wealthy, we think of names like Astor, Vanderbilt, Rockefeller or Hearst. We need to add Hetty Green to that list of mega-bucks’ investors.

Meet Hetty

Born in 1834 in New Bedford, Massachusetts, as Henrietta Howland Robinson (Hetty) was happy being at her father’s side. Her father, Edward was involved in the family whaling ship business, which his great grandfather launched the previous century. Edward was a clever businessman and increased his inheritance twenty-fold.

Hetty spent time with her father as he conducted his daily business in New Bedford. Her favorite reading included the New York and Boston papers. Hetty was more interested in investing than being social. At an early age, became dedicated to learning how to make money … and how to keep it.

Hetty’s Inheritance

In 1865, 31-year old Hetty’s father died. He left her an annual income from his $5 million trust and $6 million outright. That same year, Hetty’s Aunt Sylvia Howland bequeathed her $1 million. The combined $7 million translates into $100m in today’s dollars. Prudent investing enabled Hetty to turn her inheritance into $200 million ($17 billion in today’s currency).

Hetty’s astute investing and money management led investors and the public alike to refer to her as “the richest woman in America.” Her stinginess earned her the moniker, The Witch of Wall Street.

In 1867 Hetty married Edward Green, a Vermont businessman who made money in the Philippine silk trade. Hetty and Edward signed a pre-nuptial agreement…and only spent Edward’s money. Edward and Hetty had two children, a son Edward Howland Robinson Green (Ned) and a daughter, Hetty Sylvia Ann Robinson Green (Sylvia)

 

 

 

 

 

Beyond Frugal

In the late 1870s, despite an annual income in the mid-six figures (millions in 2012 dollars) Hetty became obsessed with frugality: her children wore second-hand clothes to school. In winter, she lined her son’s jackets and shoes with paper. Hetty fought with everyone over money and how much she had to pay. Hetty’s personal hygiene began to suffer. She rarely cleaned her clothes and kept wearing them long after they had fallen apart. Shopkeepers dreaded seeing her dirty hands handling their merchandise.

The most severe example of her frugality is when she treated her son’s injured leg (in a sledding accident) at home. Why spend the money when she could do it herself? Her remedy was not working, so she later took Ned to doctors for help. Ned still became lame in his teens, and following years of unsuccessful treatment, Ned’s leg was amputated above the knee.

Edward Green’s $2 Million

By 1881, Hetty’s husband had lost most of his money by speculating in the stock market, so she left him. Hetty had no interest in spending her money to maintain the household, so she took her children to New York where she could be closer to Wall Street. Hetty was successful as an operator on the Stock Exchange. Her peers watched in amazement as the rumpled, dirty little woman took large positions in the unregulated stock market (she liked railroads).

Hetty made money. The market was not her focus; rather Hetty’s main business was buying mortgages and lending money to bankers and brokerage houses on tough terms at high prices. Hetty liked to hold mortgages on churches and if they defaulted, she had no problem foreclosing.

Hetty’s investment strategy involved conservative investments, substantial cash reserves to back up any movement and a “cool head” in crazy times. She bought bonds when they were crashing and sold them when they were in high demand.

By the 1890s, Hetty had increased her fortune six or seven times. She kept $20 million to $40 million (half a billion in today’s dollars) in cash at all times for quick loans. More than once, the City of New York called to ask for loans.

Hetty Green was a lender in JP Morgan’s emergency operation to save the banks during the Panic of 1907 when she wrote a check for $1.1m (50 times that in today’s market). As payment, she took short-term revenue bonds.

Skinflint

During lunch, at her Wall Street office, Hetty dined on a can of oatmeal. She heated it on a radiator and ate it dry. The press followed Hetty and by the 1890s, her name was synonymous with “skinflint” or “miser.”

Hetty was always on the run from tax collectors; she felt she owed the government nothing. She moved her children from one cold-water flat to another and she took furnished rooms that were always under $22/month.

Hetty was paranoid and convinced that everyone was out to kill her. Biographer Jeffrey Tucker writes, “When a wood beam fell nearby, she was sure that it was intended for her. Same with every mishap.” In Hetty’s mind, the entire world was organized against her; she hated everyone and everything.

Hetty worked every day until she was in her mid-70s. When she was 77, she became ill with pneumonia and moved into her son’s second townhouse. As rent, Hetty paid her son amount she had been paying in her rooming house.

Hetty passed away in 1916 at the age of 81; her estimated estate was close to $200 million ($17 billion in today’s dollars). By comparison, in 1913 JP Morgan’s estate was just $80 million.

Ned Green

After a frugal existence in Chicago managing his mother’s assets, Ned moved to Texas where he managed his mother’s railroad investments. His success gave him access to large sums of money and he was able to start “living large.”

Later Ned moved to New York to oversee his mother’s financial affairs, took a large suite at the Waldorf-Astoria and later, two townhouses on West 91st Street and Central Park. In order to protect the family funds, Hetty made Ned promise to never marry. Instead, he lived with his girlfriend Mabel until his mother died.

Ned lived very well on his multi-million-dollar annual interest income from his $100 million estate. He made some generous contributions, including turning over his Dartmouth, MA estate to MIT scientists who conducted various research projects. Ned died in 1937; his estate was still valued at $100 million, the bulk of which he left to Sylvia.

Sylvia Green Wilks

Sylvia and Matthew Wilks lived in New York and were married for 15 years. In 1926, Matthew passed away. Sylvia, who was reclusive and eccentric, died in 1951; she left an after-tax estate of $90 million. Unlike her mother, who never tipped or gave money to anyone, nearly all of Sylvia’s estate was distributed to schools, hospitals and charities.

In a 1908 interview with Howard Noble, a reporter with the Boston Traveler, Mrs. Hetty Green discussed The Panic of 1907.

Below is an excerpt from Hetty’s comments:

“I saw this situation developing three years ago and I am on record as predicting it. I said then that the rich were approaching the brink and that a ‘panic’ was inevitable.”

“There were signs, which I couldn’t ignore. Some of the solidest men of the ‘street’ came to me and wanted to unload all sorts of things, from palatial residences to automobiles. The New York Central quietly negotiated with me for a big loan and that made me sit up and do some thinking, for that road is one of the wealthiest in the world”

“There had been an enormous inflation of values and when the unloading process was begun, the holders of the securities found great difficulty in getting real money from the public. The stringency was felt by the big brokers and manipulators long before the people had any inkling that such a condition existed.”

“I saw the handwriting on the wall and began quietly to call in my money, making for new transactions and getting into my hands every available dollar of my fortune against the day I knew was coming. Every real-estate deal which I could possibly close-up was converted into cash. I never buy real estate. First mortgages are good enough for me.”

“When the crash came, I had money and I was one of the very few who really had it. The others had their ‘securities’ and their ‘values.’ I had the cash and they had to come to me. They did come to me in droves. Some of them I lent money to and some I didn’t. That was my privilege. Those to whom I loaned my money got it at 6 per cent. I might just as easily have secured 40 per cent. But never in my life, no matter what has been said against me, have I practiced usury, and no one knows it better than the wealthy men who have had business dealings with me.”

“I loaned money to the New York Central, but when the Vanderbilt family applied, I refused them. They came to me some time ago—that was before the wedding—and brought a box two feet long containing the famous Vanderbilt jewels. They wanted me to take them as security and lend them money, but Lord bless you, I know nothing about diamonds and such things. This may have been worth all that was claimed, but I don’t deal in diamonds. I know a few things about real-estate mortgages, but not jewels. I have no use for them in my business.”

Hetty at Work

In 1886 a group of New York investors aimed to gain control of the ailing Georgia Central Railroad and sell off its assets. Hetty got wind of the plan and started buying shares at $70. The stock climbed to $100. Hetty could have unloaded her stake for a quick $200,000 profit. Instead, she sat tight. When the New Yorkers’ candidate for president, E.P. Alexander, offered her $115 per share, she demanded $125. If Hetty would only cast her vote his way now, said Alexander, he would meet her price eventually. Hetty’s response: “If I have to wait for my money, the price is $130.” Alexander countered with $127.50, cash on the barrelhead, and Hetty walked away with a $385,000 gain. (Forbes 11/1/2004)

Hetty’s Second Love

Hetty’s most faithful friend was a mongrel dog (Dewey). Dewey had a bad habit of biting her visitors. Most of the dog’s victims who were anxious to not offend the rich woman, tolerated the animal, but one friend had had enough. “Hetty.” She said reproachfully, “that dog bit me again. You’ve got to get rid of him.”

 

 

 

 

 

 

Hetty refused. “He loves me,” she explained, “and he doesn’t know how rich I am.” (A pawprint.com anecdote)

Although Hetty didn’t waste money for food for herself (she cooked oatmeal on an office radiator and munched on raw onions for her health), she fed steak to her dog, Dewey.

Lessons from Hetty Green

• “There is no great secret in fortune making. All you do is buy cheap and sell dear, act with thrift and shrewdness and be persistent.”

• Buy quality assets when they are cheap.

• Invest money where there is growth.

• Hetty wanted income producing assets so she could reinvest the cash.

• She learned from her father that politicians are for hire.

• Use tight-fisted management disciplines.

• Hetty liked collateral.

• She loaned money to customers she knew and on collateral she knew.

• In the 1907 panic, Hetty had cash; everyone else had securities or their “values.” Many went to Hetty to ask for loans. She charged 6% when she could have gotten 40% but she didn’t want to practice usury.

• In 1908, Hetty had $100 million+ in blue chip stocks, that she bought cheap, many first mortgages and other quality debt. She also had $20 million in cash.

 

MARK’S WORKSHOP JOURNAL

Mark decided to make his workshop more professional; he converted his workshop into an office by putting a sign on his front door and listing himself as the Village Investor. Mr. C T. Trend, a newcomer to Investorville, liked Mark and offered to help in his workshop. C.T. has spent years studying Benjamin Graham’s “Mr. Market” and has developed ways to better understand “Mr. Market”. His work compliments Mark’s for an interesting approach to value, income and growth investing.

My friend Marcy and I were looking at the life and investment lessons taught by Benjamin Graham, the father of value fundamental analysis. Marcy wanted to tell me about her grandmother.

Marcy smiled, “Grandmother invested conservatively and held back a lot of cash, she was opportunistic, focused on income and pinched pennies and evaded taxes. Her tax evasion practices including putting properties she owned in different names, which made it difficult to estimate what she was worth.

When Grandmother died, she owned about 6,000 pieces of real estate across forty-eight states including railroads, theaters, cemeteries, hotels, office buildings, and mortgages to nearly six hundred churches.

“Not bad for an old lady,” said Marcy. Then, Marcy said “Grandmother has another name- you might know her as The Witch of Wall Street.

”A “Witch” Named Hetty

I had heard of a woman named Hetty Green, known as the “Witch of Wall Street,” but I had not really looked into her life until Marcy became interested in women investors.

I wondered, what could I learn from a “witch” who was born in the 1830s and amassed her fortune during the Gilded Age?” It turns out…a lot!

Hetty learned about stocks from her father who left her a fortune. She was a savvy investor during the panics (today called corrections) of 1873, 1884, 1890, 1901, 1903 and 1907.

In 1873, she had plenty of cash to buy railroads and real estate. She bought real estate on the outskirts of growing towns, like Denver, Chicago and St. Louis. Then, she waited for the towns to grow and expand. When that happened, she sold the property for nice profits.

She did the same thing with stocks. She always had cash to buy stocks near the bottom of a panic and then waited for the prices to rise.

The Good Thing About Cash

Hetty liked to see a cash flow from her investments so she could reinvest in other things (a century before Warren Buffet did the same thing).

When she saw enormous value inflation, she would raise cash and wait for the eventual fall in prices. She didn’t need a computer to figure it out for her. She had cash in 1907 because she saw rising prices as early as 1903 and she started selling.

Hetty raised cash to invest again. Today, cash seems like a bad thing. Everybody is hedged and leveraged because they think their computer programs will bail them out. Ask Chase’s CEO Jamie Dimon about hedges and Chase’s $9 billion loss.

Income and Value

Like Hetty, John Templeton and T. Rowe Price (in the late 1960s) and Larry Tisch (in 2000 when he only had 10% of his portfolio in stocks) knew the value ofcash.

Income and value were Hetty’s game. Perhaps I should have more cash available for the next panic. The enormous inflation is now in Treasury Bonds and money supply.

It looks like value and cash has been a winner for centuries.

 

 

 

Edson Beers Gould

Edson Gould was born in 1902 in Newark; he died 1985 in West Reading PA.
After he graduated from Lehigh University in 1922, he started to work on Wall Street for Moody’s and spent most of his life researching. Initially, he wanted to be an engineer but he became obsessed with finding the one factor beyond economic and monetary conditions that sparked the market.
Edson’s journey leads to forecasts that were so frequently correct that the mere rumor of a change of would cause discernible market reactions. Everybody wanted to know what Gould had to say, but nobody wanted to believe or study his underlying reasons for his forecasts. When he died in 1985, history soon forgot him and his techniques. A quiet and simple man with reasonable simple methods (less profitable for academics and Wall Street) can easily be left to the pages of history.

Gould has been called the dean of technical analysis and the most accurate forecaster ever but he, and his methods, have gone by the wayside–just like the concepts of Charles Dow and his Theory.
Gould’s “Senti-meter,” calculated on the Dow Industrials dividends, and Dow’s concepts and theory, create a great set of indicators for and investor to use for a successful investment program.
Gould was the first to suggest that fundamentals and monetary conditions alone couldn’t explain stock market behavior. Edson read the book “The Crowd” by Gustave Le Bon (see page 4) and after re-reading it he “came to the realization that the action of the stock market is nothing more nor less than a manifestation of mass crowd psychology in action.”
Edson’s designed t h e Senti-meter to measure crowd psychology (see below) the indicator shows how much investors are willing to spend for $1.00 of dividends. Kenneth Fisher has called the Price/ Dividend Ratio “the single most powerful indicator of long term stock direction I’ve seen. It’s so simple, but inexplicably powerful.”

Decennial Pattern
Edgar Lawrence Smith pioneered the Decennial Pattern in 1939; Gould used the Decennial Pattern as a cornerstone of his technical analysis. Larry William in his book The Right Stock at The Right Time, wrote that after studying Gould’s analysis of “the 10-year pattern for stock prices” he had “been handed, figuratively speaking, the keys to the kingdom of stock market forecasting.” (See the pattern below).

The Utility Barometer
In an 1974 article, Edson Gould wrote that he thought utilities were an early stock market indicator and that they peaked and bottomed before the other indices by a few months. Gould noted times when the utilities did lead the market down and up by a few weeks or more.

The “Gould Standard”
An investor should consider sound companies with consistently strong earnings — aka the “Gould Standard.” Avoid poorly managed companies, which regularly miss Wall Street expectations, they are hunks of lead. Gould said to focus your holdings on proven winners – companies in which investor psychology will always tip back in your favor. That is one of the best ways to remove uncertainty and emotion from your portfolio.

Three Steps and Stumble
Edson Gould knew that prices rose when monetary policy was loose and money was flowing. Prices fell when money was tight. His measure for monetary policy was based on the Fed raising or lowering interest rates.
Edson said when the Fed raised interest rates 3x it would show their intent to slow the economy. When the Fed lowered rates three times it would show the intent to grow the economy.
Since 2000, Gould’s interest rate indicator hasn’t worked well. The Fed has been keeping rates low for years and money has been flooding the economy.
Gould was right in thinking monetary policy is an important influence on investor psychology and stock prices.
Edson’s original interest rate indicator could be changed to any three actions the Federal Reserve does to show its intent: it wants to expand or slow the economy or replace rates. You don’t want to fight the Fed.

 

 

 

 

 

 

 

 

 

 

 

 

 

Speed Resistance Lines

Speed resistance lines (SRLs) are also known as support and resistance lines. The lines can help a chartist determine where prices may go. The lines can show areas where prices could stop going up or down.
The story goes back to Charles Dow who said corrections usually correct 1/3 to 2/3 of their previous move. Corrections usually stop between 1/3 and ½ of the previous move. If a price goes more than 2/3 of the previous move, the trend is probably over.
Edson Gould apparently agreed with Dow and added a visual to the story.
The SRLs can be useful in judging when to buy or sell a stock. The lines can help estimate trade gains or losses and could help improve buying points, which in turn, can eliminate losses that may have occurred.
The lines can be used for both indices to see the trend and your favorite stocks and their possible moves.
Gould thought investors could make more money in longer-term holds than in shorter trade


Downtrend Line Calculations
First Line: Connecting High to Low • Middle Line: High to 2/3 point
Upper Line: High to ½ point • 2/3 point: High – (High – Low) x .667
1/3 point: High – (High – Low) x .333

The charts and explanation to the right are courtesy of StockCharts.com. They were in their ChartSchool. We recommend StockCharts.com as a website for your charting needs.
If you are a member of StockCharts.com, You can press the annotate button and the SRLs will drawn for you.

Concepts from “My Most Import Discovery” by Edson Gould

“… Here was the essential ingredient, the missing link, for which I had been searching. An apparently irrational stock market became comprehensible. Order emerged from chaos. Effect was finally linked to cause. I came to the initial realization, since reinforced, that the action of the stock market is nothing more than a manifestation of mass crowd psychology in action.

According to LeBon, “In its ordinary sense the word ‘crowd’ means a gathering of individuals of what-ever nationality, profession or sex, and the chances that brought them together. From a psychological point of view the term ‘crowd’ takes on a different significance. Under certain given circumstances, and only under those circumstances, a group of men presents new characteristics very different from those of each individual. The sentiments and ideas of people in the group take the same direction and their own personality vanishes. A collective mind is formed, doubtless transitory, and presents very clearly defined characteristics. The group has now become (in the absence of a better term), an organized crowd, or, if preferable, a psychological crowd. It forms a single being, and is subjected to the law of the mental unity of crowds.”

“The most striking peculiarity presented by a psychological crowd is the following: Whoever the individuals are that compose it (regardless of lifestyle, occupation, character, or their intelligence) the fact that they have been transformed into a group 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.”

The psychological crowd” has temporary heterogeneous elements, which for a moment are combined….
The fact that crowds possess common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds, it is stupidity and not mother-wit that is accumulated.

Presumably LeBon knew nothing about the stock market, and probably could not have cared less. But it so happened that shortly after I “discovered” LeBon, an edition of Charles Mackay’s “Extraordinary Popular Delusions and the Madness Crowds” (originally published in 1841) appeared with a forward by Bernard M. Baruch, who said:
All economic movements, by their very nature,
are motivated by crowd psychology. Graph and
business ratio are, of course, indispensable in
our groping efforts to find dependable rules to
guide us in our present world of alarms. Yet I
never see a brilliant economic thesis expounding,
as though they were geometrical theorems, the
mathematics of price movements, that I do not
recall Schiller’s dictum: ‘Anyone taken as an
individual, is tolerably sensible and reasonable
— as a member of a crowd, he at once becomes
a blockhead. Without due recognition of crowd-
thinking (which often seems crowd-madness)
our theories of economics leave much to be
desired.”

“I have always thought that if, in the lamentable era of the ‘New Economics,’ culminating in 1929, even in the very presence of dizzily spiraling prices, we had all
continuously repeated, “two and two still make four,” much of the evil might have been averted. Similarly, even in the general moment of gloom in which this
forward is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: “They always did.” This had to be it. The stock market was essentially nothing more than a manifestation of mass or crowd psychology in action. This contention is one I have repeated time and again, in my writing and speeches. In short, the stock market reflects the changing moods, emotions and feelings of the mass of investors.

As such it leads a life of its own, albeit a vicarious life, which mirrors and reflects the changing sentiments of the crowd of investors.

A crowd, as I define it, is any group with a common purpose or interest. The intelligence of the crowd is not the average intelligence of the individuals. The individual sinks to the level of the crowd, which is quite separate from, and below the intelligence of the individuals.
Crowds do not think. The do not reason. They simply react emotionally. As a near-perfect example of what I mean, and something to which almost anyone can relate, the following example is cited: You’re alone in an empty movie theater and hear the cry of “fire.” You look around, see no flames, smell no smoke. You calmly walk to the nearest exit. Repeat the same cry of “fire” (again without flames visible or the smell of smoke) in a crowded theater and once the crowd starts running for an exit, you’ll find yourself running too. That’s crowd psychology.

All subsequent experience has confirmed that the stock market is essentially a manifestation of crowd psychology in action— the result of the changing moods, feelings, sentiments and emotions of the “crowd” of investors. So, I concluded the stock market is essentially the result of three sets of factors that may be grouped under the headings: economic, monetary and psychological, the latter relating to crowd psychology.”