Book Reviews

Book Review: Confusion de Confusiones

A 331-year-old look at the Amsterdam stock exchange can help investors deal with volatility today.

Confusion de Confusiones – Jose De La Vega

Whoever wishes to win in this game must have patience … 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. … It is certain that he who does not give up hope will win, and will secure money adequate for the operations envisaged at the start. Owing to these vicissitudes, many people make themselves ridiculous because some speculators are guided by dreams, others by prophecies, these by illusions, those by moods, and unnumerable men by chimeras.

In today’s environment, there are no stronger words for those seeking to meet their long-term financial goals via the stock market. They come from Jose De La Vega, writing about the Amsterdam stock exchange (specifically, and mostly, the Dutch East India Company) circa 1688, 331 years ago. Confusion of Confusions is thought to be the first book ever about the stock market. This amazing work of striking insight has scarcely been improved upon since, and it is the little book I return to whenever the “confusion,” i.e., market volatility, grabs our attention most.

People ask: Isn’t today different than the past? Sure it is! What a world of marvels we live in compared to the 17th century. Yet, human behavior is archetypal: Our basic reactions of greed and fear, hope and panic, stubbornness and capitulation always reign—the world may change around us, but we don’t. We are the same basic gray matter of our lineage. 331 years is eons to cultural development but a blip in the scheme of evolution.

De La Vega’s is my kind of book. Full of mythic allusion and flowery, passionate language, it is the perfect pitch when emotions run highest. The book is structured as a dialectic between a stock investor and a philosopher; or, the person of action versus the person of the mind. This is an important metaphor: In times like these, our reason seems to cleave from our actions. We may know better, but we act hastily anyway. In that framework, here is a description of corrections for the ages:

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 … what is there miraculous about the likelihood that every dwarf will become a giant in the eyes of the bears?

Today’s is a world where dwarves appear as giants, indeed. That is the nature of a correction: It is the breeder of breathless confusion where basic horse sense is forgotten. I am often asked by amateur and professional alike: Can’t all this become a self-fulfilling prophecy? If everyone believes the world is bad, won’t it create an ever-winding spiral downward? Highly unlikely. There are big corrections and small bears precipitated by sentiment alone (i.e., recession-less), but they have never lasted long. They uniformly—and rapidly—punish those who give up on the fundamentals.

Belief it will never end runs strongest at times like these. But end it does, and faster than most can imagine. In the same way human nature commenced the confusion, its opposite will reignite the bull. And that tide of great redounding emotion is just as often swift on the way up, and amid just as much confusion.

Another toreador appears on the scene, earnestly trying to keep composed. He wavers as to how best to secure a profit, chews his nails, pulls his fingers, closes his eyes, takes four paces and four times talks to himself, raises his hand to his cheek as if he has a toothache, puts on a thoughtful countenance, sticks out a finger, rubs his brow, and all this accompanied by a mysterious coughing as though he could force the hand of fortune. Suddenly he rushes with violent gestures into the crowd, snaps with the fingers of one hand while with the other he makes a contemptuous gesture, takes as much as he can, acquires what comes his way with no other motive or foundation than that the call of a trumpet has reached his ear.

What Ken Fisher calls the “V”—the characteristic swift snapback after a plunge leaving most investors flat-footed—De La Vega would call the Antiperistasis: the opposite that has the greater power.

The skirmishing goes on, and at last the price is higher than before the confusion, because those groups of exchange operators who, suspecting no intrigue, had not thought of fighting and had been pursuing their regular, peaceful practices, have been awakened by the attacks. With all their strength they devote themselves to the affair and find pride in holding a weak position. Thus an obstacle becomes an advantage, and the forces which had seemed destined to throw the buyers of shares into the abyss, present them merely with an encouragement.

Equity investing is a rough business. You get by with being more right than wrong, and in the right magnitudes, over the long haul. That is how long-term financial goals are achieved. The price you pay for long-term results is often short-term chaos. Being precisely right all the time isn’t in the cards.

Amazingly, De La Vega knew something about top-down investing long before any of us at Fisher Investments had ever fathomed it. Regarding the Dutch East India Company, he posited, “the conditions in India, European Politics, and opinion on the stock exchange itself” are all that determined pricing. This is simply the way we so often describe our three pillars of analysis: economics, politics and sentiment. Today, economics and politics point to a world far better than today’s confusion. Only sentiment need reverse. The words differ, but the drivers are perennial.

In short … always speculate for a rise from natural inclination and on a fall only on occasion, because experience has shown that usually the bulls are victorious and the bears lose out.

That is 331-year-old wisdom worth heeding.


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