In this incarnation It is dedicated to all the people who perhaps see a little of themselves in the article below. I apologise in advance for any errors in the reproduction of this article:
MARKET GURUS
Gurus have been with us ever since the public entered markets. In 1841, the classic book on market manias, Extraordinary Popular Delusions and the Madness of Crowds, was published in England. It is still in print today. Its author, Charles Mackay, described the Dutch Tulip Mania, the South Seas Bubble in England, and other mass manias. Human nature changes slowly, and today new mass manias, including guru manias, continue to sweep the markets. Guru manias spring up faster now than they did centuries ago, thanks to modern telecommunications. Even educated and intelligent investors and traders follow market gurus, like the devotees of the false Messiahs in the Middle Ages. There are three types of gurus in the financial markets: market cycle gurus, magic method gurus, and dead gurus. Some gurus call important market turns. Others promote "unique methods '-new highways to riches. Still others have escaped criticism and invited cult following through the simple mechanism of departing this world.
Market Cycle Gurus
For many decades, the U.S. stock market has generally followed a four-year cycle. Significant bear market lows occurred in 1962, 1966, 1970, 1974, 1978, and 1982. The broad stock market has normally spent 2.5 or 3 years going up and 1 or 1.5 years going down. A new market cycle guru emerges in almost every major stock market cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States. A market cycle guru forecasts all major rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his next forecast. As more and more people take notice of the gum, his advice becomes a self-fulfilling prophecy. When you recognize a hot new guru, it pays to follow his advice. There are thousands of analysts, some of whom are certain to be on a hot streak at any given time. Most analysts become hot at some point in their careers for the same reason a broken clock shows the right time twice a day. Those who have tasted the joy of being on a hot streak sometimes feel crushed when it ends and they wash out of the market. But there are enough old foxes who enjoy their occasional hot streaks, yet continue working as usual after their hot streak ends. The success of a market cycle gum depends on more than short-term luck. He has a pet theory about the market. That theory-cycles, volume, Elliott Wave, whatever- is usually developed several years prior to reaching stardom. At first, the market refuses to follow an aspiring guru's pet theory. Then
the market changes and for several years comes in gear with theory. That is when the star of the market guru rises high and bright above the marketplace. Compare this to what happens to fashion models as public tastes change. One year, blondes are popular, another year, redheads. Suddenly, last year's blonde star is no longer wanted for the front cover of a major women's magazine. Everybody wants a dark model, or a woman with a birthmark on her face. A model does not change - public tastes do. Gurus always come from the fringes of market analysis. They are never establishment analysts. Institutional employees play it safe and never achieve spectacular results because each uses similar methods. A market cycle guru is an outsider with a unique theory. A guru usually earns a living publishing a newsletter and can grow rich selling his advice. Subscriptions can soar from a few hundred annually to tens of thousands. A recent market cycle guru was reported to have hired three people just to open the envelopes with money pouring into his firm. At investment conferences, a guru is surrounded by a mob of admirers. If you ever find yourself in such a crowd, notice that a guru is seldom asked questions about his theory. His admirers are content to drink in the sound of his voice. They brag to their friends about having met him. A guru remains famous for as long as the market behaves according to his theory-usually for less than the duration of one 4-year market cycle. At some point the market changes and starts marching to a different tune. A guru continues to use old methods that worked spectacularly well in the past and rapidly loses his following. When the guru's forecasts stop working, public admiration turns to hatred. It is impossible for a discredited market cycle guru to return to stardom. The reigning guru in the early 1970s was Edson Gould. He based his forecasts on policy changes of the Federal Reserve, as reflected in the discount rate. His famous rule of "three steps and a stumble" stated that if the Federal Reserve raised the discount rate three times, that showed tightening and led to a bear market. Lowering the discount rate in three steps revealed a loosening of the monetary policy and led to a bull market. Gould also developed an original charting technique called speedlines-shallow trendlines whose angles depended on the velocity of a trend and the depth of market reactions. Gould became very hot during the bear market of 1973-1974. He vaulted to prominence after correctly calling the December 1974 bottom, when the Dow Jones Industrials fell to near 500. The market rocketed higher, Gould presciently identified its important turning points using speedlines, and his fame grew. But soon the United States was flooded with liquidity, inflation intensified, and Gould's methods, developed in a different monetary environment, stopped working. By 1976, he had lost most of his following, and few people today even remember his name. The new market cycle guru emerged in 1978. Joseph Granville stated that changes in stock market volume preceded changes in prices. He expressed it colorfully: "Volume is the steam that makes the choo-choo go." Granville developed his theory while working for a major Wall Street brokerage firm. He wrote in his autobiography that the idea came to him while sitting on a toilet contemplating the design of floor tiles. Granville took his idea from the bathroom to the chartroom, but the market refused to follow his forecasts. He went broke, got divorced, and slept on the floor of his friend's office. By the late 1970s, the market started to follow Granville's scripts as never before or since, and people began to take notice. Granville toured the United States speaking to overflow crowds. He arrived on stage in a camage, issued forecasts, and chided "bagholders" who would not recognize his theory. He played piano, sang, and, on occasion, even dropped his pants to make a point. His forecasts were spectacularly correct; he drew attention to himself and became widely quoted in the mass media. Granville became big enough to move the stock market. When he announced that he was bearish, the Dow dropped over 40 points in a day - a huge decline by the standards of that time. Granville became intoxicated with his success. The market surged higher in 1982, but he remained very bearish and kept advising his dwindling band of followers to continue to sell short. The market rocketed higher into 1983. Granville finally gave up and recommended buying when the Dow doubled in value. He continued to publish a market newsletter, a shadow of his former successful self. A new guru entered the spotlight in 1984. Robert Prechter has made a name for himself as an Elliott Wave theorist. Elliott was an impecunious accountant who developed his market theory in the 1930s. He believed that the stock market rallied in 5 waves and fell in 3 waves, which in turn could be subdivided into lesser waves. Like other market cycle gurus before him, Prechter had been writing an advisory letter for many years with modest success. When the bull market penetrated the 1000 level on the Dow, people began to pay attention to the young analyst who kept calling for the Dow to reach 3000. The bull market went from strength to strength, and Prechter s fame grew by leaps and bounds. In the roaring bull market of the 1980s, Prechter's fame swept outside the narrow world of investment newsletters and conferences. Prechter appeared on national television and was interviewed by popular magazines. In October 1987, he appeared to vacillate, first issuing a sell signal, then telling his followers to get ready to buy. As the Dow crashed 500 points, mass adulation of Prechter gave way to scorn and hatred. Some blamed him for the decline, others were angry that the market never reached his stated target of 3000. Prechter's advisory business shrank, and he largely retired from it. All market cycle gurus have several traits in common. They become active in the forecasting business several years prior to reaching stardom. Each has a unique theory, a few followers, and some credibility, conferred by sheer survival in the advisory business. The fact that each gurus theory did not work for a number of years is ignored by his followers. When the theory becomes correct, the mass media take notice. When a theory stops working, mass adulation of a guru turns to hatred. When you recognize that a successful new guru is emerging, it is profitable to jump on his bandwagon. It is even more important to recognize when a guru has reached his peak. All gurus crash- and by definition, they crash from the height of their fame. When a guru becomes accepted by the mass media, it is a sign that he has reached his crest. The mainstream media is wary of outsiders. When several mass magazines devote space to a hot market guru, you know that his end is near. Another warning sign that a market guru has reached his peak occurs when he is interviewed by Barron's-America's largest business weekly. Every January, Barron's invites a panel of prominent analysts to dispense wisdom and issue forecasts for the year ahead. The panel is usually made up of "safe" analysts who focus on price earnings ratios, emerging growth industries, and so on. It is highly atypical of Barron's to invite a hot guru with an offbeat theory to its January panel. A guru gets invited only when the public clamors for him, and to exclude him would diminish the prestige of the magazine. Both Granville and Prechter were invited to the January panel when each man was at the crest of his fame. Each guru fell within a few months of appearing on that panel. The next time a market guru is on Barron's January panel, do not renew your subscription to his newsletter. Mass psychology being what it is, new gurus will certainly emerge. An old cycle guru never fully comes back. Once he stumbles, the adulation turns to derision and hatred. An expensive vase, once shattered, can never be fully restored.
Magic Method Gurus
Market cycle gurus are creatures of the stock market, but "method gurus" are more prominent in the derivative markets, especially in the futures markets. A "method guru" erupts on the financial scene after discovering a new analytic or trading method. Traders always look for an edge, an advantage over fellow traders. Like knights shopping for swords, they are willing to pay handsomely for their trading tools. No price is too high if it lets them tap into a money pipeline. A magic method guru sells a new set of keys to market profits. As soon as enough people become familiar with a new method and test it in the markets, it inevitably deteriorates and starts losing popularity. Markets are forever changing, and the methods that worked yesterday are not likely to work today and even less likely to work a year from now. In the early 1970s, Chicago market letter writer Jake Bemstein became hot by using market cycles to call tops and bottoms. His methods worked well and his fame spread. Bernstein charged high fees for his newsletters, ran conferences, managed funds, and produced an endless flow of books. As usual, the markets changed, becoming less and less cyclical in the 1980s. Peter Steidlmayer was another method guru whose star rose high above Chicago. He urged his followers to discard old trading methods in favor of his Market Profile. That method promised to reveal the secrets of supply and demand and give true believers an ability to buy at the bottoms and sell at the tops. Steidlmayer teamed up with entrepreneur Kevin Koy, and their frequent seminars attracted upward of 50 people who paid $1600 for a 4-day class. There appeared to be no conspicuous examples of success among Market Profile devotees, and the founders had a nasty falling out. Steidlmayer got a job with a brokerage firm, and both he and Koy continued to give occasional seminars. Oddly enough, even in this era of fast global links, reputations change slowly. A guru whose image has been destroyed in his own country can make money peddling his theory overseas. That point has been made to me by a guru who compared his continued popularity in Asia to what happens to faded American singers and movie stars. They are unable to attract an audience in the United States, but they can still make a living singing abroad.Dead Gurus
The third type of a market gum is a dead gum. His books are reissued, his market courses are scrutinized by new generations of eager traders, and the legend of the dear-departed analyst's prowess and personal wealth grows posthumously. The dead guru is no longer among us and cannot capitalize on his fame. Other promoters profit from his reputation and from expired copyrights. One dear-departed guru is R. N. Elliott, but the best example of such a legend is W. D. Gann. Various opportunists sell "Gann courses" and "Gann software." They claim that Gann was one of the best traders who ever lived, that he left a $50 million estate, and so on. I interviewed W. D. Gann's son, an analyst for a Boston bank. He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. When W. D. Gann died in the 1950s, his estate, including his house, was valued at slightly over $100,000. The legend of W. D. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers.
The Followers of Gurus
The personalities of market gurus differ. Some are dead, but those who are alive range from serious academic types to great showmen. A guru has to produce original research for several years, then get lucky when the market turns his way. To read about the scandals that surrounded many gurus, try Winner Takes All by William Gallacher and The Dow Jones Guide to Trading Systems by Bruce Babcock. The purpose of this section is simply analysis of the guru phenomenon. When we pay a guru, we expect to get back more than we spend. We act like a man who bets a few dollars against a three-card monte dealer on a street comer. He hopes to win more than he put down on an overturned crate. Only the ignorant or greedy take the bait. Some people turn to gurus in search of a strong leader. They look for a parent-like omniscient provider. As a friend once said, "They walk with their umbilical cords in hand, looking for a place to plug them in." A smart promoter provides such a receptacle, for a fee. The public wants gurus, and new gurus will come. As an intelligent trader; you must realize that in the long run, no guru is going to make you rich. You have to work on that yourself.
No comments:
Post a Comment