Visualizing History

From the Archives

Psychology of the Stock Market (1912)

Despite all the facts, figures, and statistics… so much of the stock market comes down to human behavior. As my boss, Jim O’Shaughnessy likes to say, “human nature is the last arbitrage.”  I recommend reading the table of contents, and reading the section that sounds most interesting to you. These primary sources, more than 100 years old, are an absolute treasure trove of insights and passages. Trust me, and take the time to read this:

‘MOST experienced professional traders in the stock market will readily admit that the minor fluctuations, amounting to perhaps five or ten dollars a share in the active speculative issues, are chiefly psychological. They result from varying attitudes of the public mind, or, more strictly, from the mental attitudes of those persons who are interested in the market at the time.’

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Sunday Reads

The recent swings in equity markets have made it feel like there may be some nefarious character controlling the ebbs and flows of returns similar to the depiction of Jay Gould in the cartoon above. On Monday of this week, for example, Jason Zweig pointed out that “the Dow Jones Industrial Average moved 1,000 points in a single day – twice. It sank more than 3%, then roared back up to close with a gain.”

These challenging few weeks in the markets have provided us with an opportunity to reflect on how much we believe in the assets we own in our portfolios. My friend Jim Chanos has long talked about the fact that people only tend to question their investments when they are losing money. If you’re generating great returns, why question them? When you are losing money, though, you want answersNow.

A great irony in investing is that when asset prices are rising, investors typically require less conviction or belief in an asset to purchase it. When prices are falling, however, investors meticulously study the merits of an investment and make sure they have strong conviction in its prospects. This relationship between prices and conviction is a bewildering paradox.

The last few weeks have provided a glimpse into how flimsy many investor’s convictions are in the speculative stocks they’ve recently purchased. Today’s WSJ article on Cathie Wood’s ARK strategies highlights this issue:

“a 50-year-old business-development executive from Los Angeles, said he sold his ARK Innovation fund shares in November and has boosted his cash holdings after losing about 20% in the fund in less than a year. ‘I gotta go back to real fundamentals,’ he said.

Ms. Wood’s early returns gained her a large following on YouTube, Twitter and other social-media platforms… a 58-year-old sales director from Chicago, bought ARK Innovation shares at the end of 2020, in part because he saw her on TV and his financial adviser flagged the fund as one of the hottest in the market. He sold last year after losing 10% of his investment and now thinks he might have gotten carried away.

‘For me, these were way too speculative’… [he] said. ‘It didn’t really jibe with more core financial beliefs’.”

The best way to get through periods of market volatility and falling prices like the last few weeks is to have strong conviction in the investments you buy. Understanding a company’s longer-term business prospects can help investors ignore the noise during periods of short-term volatility.

If you are going to actively invest in stocks, you must actively learn about the companies you are purchasing. Just investing because something goes up makes it more likely you’ll panic when it inevitably goes down (even temporarily).

I’m not saying that this is necessarily a realistic example, but this financial history anecdote is my favorite example of having conviction.

Strong Conviction: Nomura’s Epic 1905 Short 

Tokushichi Nomura, founder of the modern Nomura Holdings, was fortunate enough to begin his investing career during a Japanese bull market in the early 1900s. As the overall market continued to soar, Nomura seemed to profit on every investment he made.

Tokushichi Nomura

Despite his successes, Nomura remained a disciplined investor, and turned to his research as the market began to feel frothy. After comparing valuations in Japan against other global markets, he concluded that Japanese stocks were overpriced, and due for a correction. On a dime, Nomura sold all his stocks (at a profit) to fund his new investment: a large short position on the market. These ‘shorts’ would profit if the stock market fell.

Unfortunately for Nomura, however, his fellow investors did not share this bearish outlook. Each day, the disciplined investor watched with agony as the overvalued stocks continued to climb higher. For just as Nomura’s short positions made money if the market declined, he lost money if the market went up. Margin calls started pouring in as Nomura’s positions began to plummet.

Tokyo Financial District (1910)

When creditors came to his office seeking repayment, Nomura hid under his desk to avoid confrontation. He even hired an enclosed rickshaw to transport him through the Tokyo side streets so that no one could watch his movements. Despite the financial and emotional toll, Nomura doubled down and purchased additional short positions. While many of his peers were swept up by the bull market euphoria, Nomura was grounded by his empirical research showing that stocks were overvalued.

To others, however, Nomura appeared to have gone mad. Why did he insist on continuing his failed bet against the market? When he asked a friend, Shibayama, for a loan to finance his margin calls, Shibayama urged him to reconsider. Nomura maintained his conviction:

“He [Nomura] handed Shibayama a list of all his personal assets and pledged them to the bank. ‘I am betting my life that I am correct. If someone considers a matter thoroughly and does nothing, the outcome is the same as if he had considered nothing at all. I have never been wrong.’”

Two days later, Nomura’s data-driven investment thesis came to fruition. Japanese stocks began to slowly decline, before then plummeting 88% in a matter of months. Nomura’s discipline paid off handsomely, as he profited $80M (2018 dollars) from his short bets.

Now let’s dive into the history of investor psychology during selloffs, finanicial news indicators, and the question of “protecting” retail investors.


Who Panics During Panics? 19th Century Evidence

Why This is Relevant:

During all the phases of speculative excess that transpired during the pandemic, a key question/concern has been how speculators would react when things went south. Would they “hodl”? Would they panic sell? Well, using the accounts of customers at banks at the time, the paper specifically calls out what categories of people ‘panicked’ during the panics of 1854 and 1857.


“Using records of the bank accounts of individual depositors, this paper provides a detailed micro-economic analysis of two nineteenth century banking panics. The panics of 1854 and 1857 were not characterized by an immediate mass panic of depositors and had important time dimensions. We examine depositor behavior using a hazard model. Contagion was the key factor in 1854 but it was not strong enough to create more than a local panic. In contrast, the panic of 1857 began with runs by businessmen and banking sophisticates followed by less informed depositors. Uninformed contagion may have been present, but the evidence suggests that this panic was driven by informational shocks in the face of asymmetric information about the true condition of bank portfolios.”

Visualizing History:

Notable Quote:

“Banking panics were not characterized by an immediate mass panic of depositors, and account closings were a modest fraction of all accounts. Although depositor behavior clearly changed quite rapidly, there were time dimensions to the panics. Account closings rise quickly, with distinct jumps in the number per day, often apparently influenced by news. The heterogeneous behavior of depositors allows us to see that there were elements of contagion and responses to dramatic news events. However, while contagion seems to have been present, it does not appear to be strong enough to drive the panic onwards in 1854, the one panic most likely to have been driven by pure uninformed contagion. The panic of 1857 appears more likely to have been led by business leaders and banking sophisticates followed by less informed depositors. Uninformed contagion may be present, but the evidence suggests that the run on the banks was driven by informational shocks in the face of asymmetric information about the true condition of bank portfolios.”


Patterns of Panic: Financial Crisis Language in Historical Newspapers

Messengers from brokerage houses crowd around a newspaper in New York City on October 24, 1929

Why This is Relevant:

Headlines during bear markets today have a tendency to give off ‘Armageddon’ vibes (think CNBC’s “Markets in Turmoil”). The newspapers are also a great source for understanding investor’s sentiment in a particular period. Performing text and sentiment analysis on over 35 MILLION (!) newspaper titles, this article compares the content of news articles with other major economic indicators and measures of financial instability.


“This paper presents a new indicator on financial stress from 1889 to 2016 based on the reporting in five major US newspapers. This indicator provides detailed and high-frequency coverage of more than a century of financial history based on a previously untapped corpus of 35 million newspaper titles. I validate the indicator using 23,000 manually coded articles. The indicator displays plausible co-movement with key economic variables and other measures of financial instability. Periods of negative financial sentiment predict recessions, rising unemployment, foreshadow lower stock market performance and rising corporate bond spreads.”

Visualizing History:

In the best chart of the whole article, the author also shares the long-term data for his ‘Financial Stress Indicator’, exhibiting both the exuberant periods where markets are overly calm, and the skyrocketing levels of ‘stress’ are markets are snapped back to reality:

Notable Quote:

“Newspapers have been called ‘the first draft of history’. When looking back at more than a century of financial history, we can learn a lot from reading that first draft again. Events that were salient to observers at the time might be glanced over in the historical narratives. This real-time and subjective view of financial markets serves as an important complement to our usual data sources.”

Stock Market Swings and the Value of Innovation (1908-1929)

Why This is Relevant:

Most of the wild market gyrations this year have been in large cap tech stocks, which are heavily tied to the perceived value of their “innovations”. This paper looks at how investors perceived the value of innovations and intangibles in the 1920s stock market boom, and how these perceptions impacted prices.


“A recurrent theme in the modern literature on the economics of financial markets is the extent to which stock market swings reflect changes in the present discounted value of expected future earnings or the ‘animal spirits’ of investors. For example, the rapid acceleration in stock prices during the 1990s can be explained both by changes in expected investor payoffs in response to the accumulation of intangible capital by firms, and by behavioral phenomenon that caused a speculative bubble. Whether swings in the stock market are driven by the diffusion of new technologies or by periods of irrational exuberance is an important question in the economics of innovation and finance…

it is also important to a fuller understanding of another major event in the American stock market – the run-up in equity prices during the 1920s and the Great Crash of 1929. While Irving Fisher famously reported on the eve of the Crash that stock prices would remain permanently higher than in past years due to the arrival of new technologies and advances in managerial organization that created positive expectations about future profits and dividend growth, retrospective analysis has indicated the presence of a ‘bubble’. The speculative bubble hypothesis has become orthodox in the literature given that the S&P Composite Index fell by more than 80 percent from its September 1929 peak to its level in June 1932. The Great Crash is the canonical example in American financial history of market prices diverging significantly from fundamentals.”

Visualizing History:

Notable Quote:

“The high trading volume on the New York Stock Exchange during the 1920s is consistent with high levels of uncertainty. Since no-one knew what RCA’s dividend trajectory looked like (because it didn’t pay a dividend) the firm had some probability of failing and some probability of becoming a market leader, and therefore became extremely valuable to investors in much the same way that Nasdaq stocks had some probability of failing, but also some probability of becoming the next Microsoft… Relative to the 1910s, the 1920s was a much more uncertain epoch concerning how technology would influence the future profitability of firms since the technological change taking place was so far reaching.”


Which Investors to Protect? Evolving Conceptions of the American Shareholder

Caption: “Wall Street Persians & The Washington Egyptians

At the battle of Pelusium, between Egypt and Persia, the Persians armed themselves with cats, the sacred animals of Egypt. The disconcerted Egyptians dared not shoot their arrows, for fear of hitting holy cats.”


“Illustration shows the battle of Pelusium with the Persians identified as having ‘Vested Interests’ (looking like Chauncey M. Depew), belonging to a ‘Wall Street Syndicate’ (looking like John D. Rockefeller), or a ‘Railroad Trust’, throwing cats labeled ‘Small Stock Holder, Small Investor, Widow, Little Stock Holder, [and] Orphan’ at the bewildered Egyptians who are outside a building labeled ‘Administration’ and flying a banner labeled ‘Federal Prosecution’.”

Why This is Relevant:

Within the financial services industry, “democratization” is currently the buzzword du jour. Let’s just say that the term is also being used “liberally”, to put it mildly. As with most buzzwords that plague the industry, the “democratization” narrative is now being wielded by a variety of institutions looking to capitalize on this trend. Every FinTech startup is now democratizing something, and has a mission of helping/protecting the “helpless” retail investor.

However, why does the industry often refer to smaller retail investors in this condescending and patronizing tone? Has the average retail investor always been viewed in this way? Well, this paper looks at the history of how average American shareholders have been perceived and treated since the late 1800s.

“stylized images of the investor are driven by changes in politics, technology, and culture. In turn, the images influence regulators’ views both about how to protect investors, and about how investors should behave in a normative sense.

For instance, attitudes towards the wisdom of individual stock-picking have fluctuated over the century… in the 1950s, some SEC commissioners worried that mutual funds would deprive investors of both the impetus and savvy to engage in individual stock-picking. Later, especially after the rise of modern portfolio theory and the invention of passive index funds, the pendulum swung in the opposite direction, with a growing emphasis on the benefits to the average individual investor of diversification and passive investment.

Today, perhaps suggesting that the pendulum has not come to rest, the SEC’s Office of Investor Education and Advocacy awkwardly embraces stock-picking alongside passive index fund investing in its introductory investing materials.”

Better yet, the last section of the paper specifically touches upon the GameStop saga within this broader historical context.


“A system of investor protection rests on a theory of which investors need protection. This chapter surveys the composition and perception of individual investors in American capital markets from 1900 to the present. The retail investor base has expanded remarkably during that time. Beyond the statistics, distinct “images” of the shareholder—that is, perceptions of the prototypical American investor—have dominated at different moments of U.S. securities law history. Although no one image will ever capture the full complexity of capital markets, I attempt to identify prevailing images in specific eras of securities regulation history, by examining comments by policymakers and industry participants. These images influence policy priorities and design.”

Visualizing History:

U.S. Equity Ownership (Percentage)

Notable Quote:

“For much of early American business history—through the mid-19th century—the landscape had been dominated by smaller, owner-managed businesses, often in the form of partnerships or sole proprietorships. Those businesses gave way to larger-scale industrial enterprises in the late 19th century, ownership of enterprise was both concentrated and very much the province of the wealthy. The best-known and largest firms either bore the names of their owners or were deeply linked in the public imagination to them—Carnegie, Rockefeller, Mellon, Ford.

For the most part, American participation in the stock market was rare, and seen as highly risky. Risk, to be sure, had a long and complicated relationship with the American ethos. But in 1899, by some accounts, less than 1% of Americans owned either stocks or bonds.

That changed rapidly in the next decade… in 1932, a seismic restructuring in capital formation had already occurred. The highly concentrated ownership of the Gilded Age was giving way to a system of dispersed shareholding and centralized management, one that more closely resembles our contemporary markets. That transformation was “rapidly increasing, and appeared to be an inevitable development,” already quite pervasive in the largest businesses… those “multitudinous investors” were not simply the rich but also those of “small or moderate means.”



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