Lessons From The Oldest Texts on Market Psychology: Confusion Des Confusiones (1688) and The Fountain of Gold (1755)
Confusion des confusiones
Joseph De La Vega, 1688
Joseph De La Vega (1650–1692) was a Spanish Jewish merchant, financial expert, and poet, residing in 17th century Amsterdam. His masterpiece, Confusion Des Confusiones, is the first study written about the Amsterdam Stock Exchange, and was written as a dialogue between a merchant, shareholder, and philosopher as to best illustrate the various perspectives of market participants.
The publication of this book helped lay the foundations for modern fields of technical analysis and behavioral finance. The text in its entirety can be found here. Aptly named Confusion Des Confusiones, because:
“There was no rational purpose in the activities which was not overlaid with an irrational one, no trick used by one person which others did not pay back with the same coin, so that, in this stock-exchange business, one moved in a world of darkness which nobody wholly understood and no pen was really able to describe in all of its intricacies.”
Philosopher:
“And what kind of business is this about which I have often heard people talk but which I neither understand nor have made any efforts to comprehend?
Shareholder:
“I really must say you are an ignorant person, friend Greybeard, if you know nothing of this enigmatic business which is at once the fairest and most deceitful in Europe, the noblest and most infamous in the world, the finest and most vulgar on Earth. It is a touchstone of 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.”
Three Classes of Men
[Three classes of men are to be distinguished on the stock exchange. The princess of business belong to the first class, the merchants to the second, and the speculators to the last. The financial lords and big capitalists enjoy the dividends. They do not care about the movements of the stock since their interest lies not in the sale of stock but revenues secured through their dividends. The second class is formed by merchants. They consider their risk as much as their profit, they prefer to gain little, but to gain that little with relative security, and to have no worries other than those bound up in 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 a life has been created by these schemers! The labyrinth of Crete was no more complicated than the labyrinth of their plans…]
Philosopher:
“I cannot deny that, in spite of my natural inclination, I would try my fortune [on the exchange] if three great obstacles did not prevent me.
First obstacle: I question whether I should go aboard such an endangered ship, to which every wind means a storm and every wave a shipwreck.
Second obstacle: With my limited capital, I could win… only if I were willing to renounce my reputation frivolously. But to feel degraded… without being compensated by wealth, such a thought is vain and insane.
Third obstacle: Preoccupation with this business seems to me unworthy of a philosopher, and, furthermore, since everyone knows the humble character of my surroundings, there would be nobody to give me credit and to have confidence in my beard (for they would see I cannot pay for stocks on my own account). There would be nobody to lend me money on my beard… unless it were a beard of gold like that of Aesculapius in the story of Dionysius…
Shareholder:
“Even without going into technicalities I can overcome your doubts. The first danger is removed, because [I can tell you] there are ropes which secure the vessels against shipwreck and anchors which resist the storm.
Four Principles:
“The difficulties and the frightful occurrences in the exchange business… have taught some precepts…
The first principle [in speculation]: 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 for 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 treasure 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 this game must have patience and money, since the values 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.
Bulls and Bears
“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.”
“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. But if there are sheep in Africa that are supposed to serve as donkeys and wethers to serve even as horses, what is there miraculous about the likelihood that every dwarf will become a giant in the eyes of the bears?”
The Company
“The Company is like the immortal tree [of mythology] which unexpectingly [and quickly] brings forth a new branch when an old one is cut off; there is no reason, therefore, [ever] to be alarmed about the Company’s situation, because it overcomes every obstruction immediately by a new development.”
Expectation Vs. Reality
“The expectation of an event creates a much deeper impression upon the exchange than the event itself. When large dividends or rich imports are expected, shares will rise in price; but if the expectation becomes a reality, the shares often fall; for the joy over the favorable development and the jubilation over a lucky chance have abated in the meantime.”
The Fountain of Gold — The Three Monkey Record of Money
Munehisa Homma, 1755
Honma Munehisa was born in 1717 in Dewa, Japan. At age 23, he was adopted by the Honma, a wealthy merchant family from Sakata. He amassed an enormous fortune with godly trading skills at the Dojima Rice Exchange in Osaka, and made the Honma family the richest merchant family during the Edo Era.
In Japan, he is called the god of the markets and the heaven of merchants. He is known as the father of the candlestick chart. The Fountain of Gold is a 37 page list of rules and observations. What follows are, what I believe, to be the most valuable excerpts.
Introduction
“Farming and investment share the same roots;
It is the people who do the work,
But it is the grace of heaven that makes things grow.
Those with a pure mind who believe in heaven
Will be guided into a bountiful world;
The mind always counts more than the loss or profit.”
The Highs and Lows of the Trend are the Law of Nature
“The rise and fall of the rice price follows the law of nature, and it is hard to identify either the down or up moments while it goes up and down continuously. Those who are ignorant of this rule should not even attempt to try their hand at trading.”
Wait Calmly When You Have Missed the Perfect Time to Buy
“If the rice price goes up by 2 koku just when you have decided to buy rice, you may think you missed the perfect time to buy and it is a better time to sell, but this would be a big mistake. When you have missed the best time to buy, you should wait for the next opportunity to buy.”
“There are times when just as you have made your buy at the bottom and expected some profit, the price stagnates or goes down slightly. When this happens you think you have miscalculated the market and you regret that you didn’t sell when the price went up previously. But this is the wrong way to think. When you buy at the bottom, you should never sell until the trend makes a shift.”
State of Mind at the Time of Good Luck
“When an opportunity presents itself to make profit from trading, you should go for the profit-taking at an appropriate level. Then take a two day break. If you forget to take a break at this time, you are sure to cause a loss at the end of trading no matter what profit-making opportunity knocks at your door. You cause a loss because your greed prevents you from making the right decision and because you become so overconfident of your winning that you wish to make 200 when you made a 100 profit before, and wish to make 2000 profit when”
When Moving Without a Stable Mind, There Will be Only Loss
“Even when you anticipate the rice price going up, you become reluctant to buy or sell when you see signs of the price going down, and when the price goes down after having gone up slightly, you think it is a bearish market. People often move without any firm conviction in mind. When you look back and think of the trend later, it seems easy for you to respond to the market formation by selling when the price goes up and buying when price goes down, but it is not easy to identify the market trend accurately. You should remain observant for at least two months until you are sure of a temporary bearish market. As long as your mind is chained to the up and down trend of the market, you will be lost throughout the year because of the market trends. Consequently, you will lose and cause loss in the end.”
Going Against the Trend is Not Allowed
“There are times when you decide to sell off your offerings because your forecast for the market is gloomy, but your forecast turns out to be wrong and it leads you to loss. Intending to distribute,28 some people begin to sell off their rice when the price is moving upward, but this is very wrong. You must not go against the trend. The same applies when you buy. When you realize your market forecast was wrong, take your hands off the market and remain observant.”
When I am Optimistic, All Others are Optimistic Too
“When the market seems bearish and you are frequently tempted to sell off, wait for three days, change your mind, and you are sure to win if you decide to buy instead. You also need to change your mind when you are sure the price is going to go up. This is a profound rule in rice trading. Don’t forget this. When you are optimistic, all others are optimistic: when you are pessimistic, all others are pessimistic too. People’s minds cannot comprehend the profound law of Ying and Yang, which governs the rise and fall of the rice price; it is destined destined to go down after going up to its limit, and to go up after going down to its limit. You only need to rely on the “Three Methods.”
Leave Emotions When Trading
“You should never sell or buy because you are angry. This should never happen.”
Rice Trading is like Military Strategy
“Three Military Strategies and Six Secret Teachings is the Wen Wei (文偉) of Military Strategies. It teaches you the importance of being well prepared, and the skills to build strong base. You also need to learn how it is impossible to win and defeat the enemies every time. Rice trading is like the military art. You trade with tens of thousands of people but you do not say you make laws and abide by them. Three Methods should be more open for interpretation than the writings in the Three Military Strategies and Six Secret Teachings. If it is cold for three years after making a shift in July, you arrive at a formation comparable to the Eight Formations (Ba Zhen 八陣). You must cherish the lessons with a sense of awe and respect.”
Mindset is Everything
“When trading futures in the eleventh month of frost, your mindset is the most important. For example, you should be ready, in your mind to make 500 koku of profit when you can make a thousand koku of profit, depending on your financial situation. You should also take 50 koku of profit when you could have made 100 koku of profit. Unless your mind is set in this way, you will be tempted and reckless, trade be it at the ceiling or at the bottom, until you fail to make any profit after having worked so hard. Those who want to take this path have to have this kind of mindset.”
Foolish Debates over the Highs and Lows of the Market Price
“No matter how close a friend you are with someone, it is not good to give advice to your friend on buying and selling. When your analysis turns out to be wrong, you can create a big conflict. In addition, debating the high and low of the market price is not good, either. Those who follow the path do not force their analysis on others, and do not trade based on analysis by others. If the prediction turns out to be correct even just to a certain degree, you become arrogant and want to boast of your analytical skills. You have to avoid this attitude. Of course when you explain your method to others, you can make the others believe you and could possibly help the others make some profits — perhaps two or three koku — but you can never give them a winning card. Do not get involved in somebody else’s business when you trade. It is most ideal to listen to the news about what it is like in Kyushu, the market conditions in Osaka, bad harvest and good harvest, and the general harvest conditions. Never tell others what is in your mind. This is a grand secret. Always keep it to yourself. ”
Trading Throughout the Year Brings About Less Winning
“If you trade throughout the year, you become more distant from the winning streak. Sometimes it is best for you to keep your hands off and take a break.”
Do Not Trade Based on the Daily Market Fluctuation
“It is not advisable to trade based on the daily fluctuation of the market price. Think of the ‘Three Methods”, and observe the market to see how much the price is going up or down during the up and down trend, and at what point it stops, while at the same time thinking of the harvest condition of local granaries and market formation in Osaka, and what position you should keep. For example, when you make your move to buy, you must buy after making a firm position, and disregarding the ups and downs of the price that you have seen. But thinking of buying at cheap price and selling at higher price only require too much work and does not return good profit. ”
Never Show These Writings to Others
“This writing, you should never show to anybody no matter how close they are to you. It is not because I want to remain the only rich person. Rather, it is because this writing could be misunderstood by some people, who are likely to end up making mistakes, and even worse it could cause damage to them and even create hostility against us. It is not advisable for others to see this and that is why it has to remain a secret. The Three Methods in particular are rarely taught techniques and few people in the world know about them. If you sell and purchase based on these rules, you will make profits and build a fortune, and will not end up losing. You have to value this writing and be cautious and determined in keeping this a secret from others.”
