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7/20/2005
Victor Niederhoffer on Actions and Reactions, an Autobiography of Roger Babson

The successful man is the one who had the chance and took it. -- Roger Babson

In reviewing the autobiography, Actions and Reactions by Roger Babson, one hears the song and lyrics of "Something Wonderful " by Rogers and Hammerstein.

This is a man ... as long as you live
he'll do something wonderful,
He has a thousand dreams,
That won't come true
You know that he believes in them.

Among the dreams that Babson did make true were the founding of three colleges; Babson with more than 3200 students, Wooster, the first women's business college, and Utopia College, a utopian college in the 'center of gravity' of the US, (Eureka, Kansas). He was responsible for founding the first investment counseling firm which has grown into Babson Capital with some 100 billion under management, the founding and development of the first US financial statistics firms, including Standard and Poor's, Moodies, Babson Statistical services, and United Business Service, the writing of 47 books, and thousands of articles for Saturday Evening Post in its hayday. He was a public speaker extraordinaire, Presidential Candidate in 1940 (he placed 3rd), a trusted adviser and friend to men of genius including Steinmetz, Ford and Edison.

He was the founder of the Federal Home Loan Bank and related reconstruction type government interventionist organizations, inventor of a million adages including 25 carved in stone in Dogtown, Mass; major collector and popularizer of Newton's writings, the main forecaster of the 1929 crash, the successful entrepreneur who established and or promoted numerous businesses in financial services, health, safety , the visionary, one of the major investors of land in Orlando and Central Florida. And yes, this was a man who believed in anti-gravity, a man who was wrong about perpetual motion, a man who believed the problems of crime came from bad movies and radio, (which he tried to remedy with his own operation in each), a man who wrote all his books and articles outside for health, a man who conquered tuberculosis at the age of 25 and lived to be 93.

Most investors will turn to Babson for his development of the Babsonchart which is an attempt to apply Newton's third law of motion " For every action there is an equal and opposite re-action " to the market. Babson believed that a normal line of stock market movement could be developed and that areas above and below the normal line were equal. "We assumed that after a depression area, another period of prosperity would occur equal in area to the preceding area . We took cognizance of the shape of the areas, an area might be deep in intensity and short in duration or shallow in intensity and long in durations. In both cases, the square millimeters should be about equal. Furthermore, the ups and downs of each industry always bear a relation to the chart. One industry will reach its high point in the early part of an area of prosperity, and it's low point in the early part of depression. This is true of the stock market, a study of the stock line, bond line, and commodity line shows that there is a certain relationship between them. Remember however that the steeper the decline and the deeper the area, the shorted will be its duration and the more rapid will be its rebound, and vice versa.

While Babson's theories on market movements are mumbo jumbo of the highest degree, they are suggestive of interesting statistical relations that should be tested. And the student with an inquiring mind, and a good inclination to counting could make much by sharpening and testing the ever changing nature of the interlocking relations in the variables considered by Babson. It is no wonder with false theories of fixed relations such as this that Babson was known as the prophet of doom in his day, much as Prechter is today, and that after predicting a constant depression from 1927 to 1929 he was laughed off as a chronic pessimist until he hit the bullseye with yet another early September 1929 prediction of a crash which he is remembered for today.

A much more valuable feature of the book is the panorama it provides of American business conditions in the 1890-1940 area . Along with Henry Clews book, 50 years in Wall Street, the student now has available a rather complete history of American business practices and history ,especially in the financial era. And yes, of course the main lesson is that conditions today are most similar to the way they were 100 years ago, and that the unraveling of the lessons of financial history is key to understanding today. Another lesson is that panics were as common as fires on the prairies in those days and almost all of Babson's friends, went under at one time or another thru overextension. In one of the most valuable parts of the book, Babson remarks that he keeps a copy of the complete issues of the Commercial and Financial Chronicle from 1870 to the present, and that whenever he wants to forecast the market, he finds what part of history the current most resembles, and then he looks thru the Chronicle to see what happened in those periods.

As a student of the market with his own independent research, who knows that cycles are always ever changing and that there are numerous random and unpredictable features of the market, I do not find Babson's theories on markets overly valuable, except as a spur to independent investigation. It would be interesting to quantify some of these theories on a prospective basis, trying to predict such things as the future distribution of prices, when a trend line is broken, based on the duration and depth of the previous moves. But what I found much more valuable from the bio were Babson's insights on business. Here are a few sample nuggets:

  1. Always buy a repeat products company as compared to an equipment company.
  2. Sell a company between the funeral of its founder and the installation of his son as the new CEO.
  3. Always ventilate your offices each day, make sure the air is fresh and moving, and work outside as much as possible.
  4. Use paper towels at all times, and wash your hands thoroughly.
  5. Analyze business cycles in terms of the health and happiness of the populace, their emotions, and the ratio of bonds issued at the end with rampant securitation of equity being the harbinger of imminent decline.

Roger Babson was a wonderful man and his book even when wrong will make you strong.

7/20/2005
Pt II: The Laws of Actions and Reactions, by Victor Niederhoffer

Roger Babson, who believes in the possibility of an anti-gravity device and a perpetual motion machine, espouses a theory in his autobiography Actions and Reactions that markets spend an equal area of time below a trend line and above. He feels this is an implication of Newton's laws of motion. But how to test such a view? By area, he means the integral or rectangular area of the time that a market is below a trend line, versus above.

The defects of his theory are like those of most trend line'ists in that the changes in trend can only be determined after the event has happened. I would propose to test his theory by looking at at the cumulative sum of the moves below a moving average versus the expected distribution of future moves once a movement above has occurred. Some consideration should be given to the slope of the movement as Babson believe that the greater the previous slope on one side, the longer the duration on the other side in the future.

Mr. Babson has theories on the proper use of paper towels, the avoidance of colds, the selection of proper mates, the efficacy of prayer, the values of repeat versus equipment businesses, and the use of buggy rides that are more in line with our normal métier.

John Bollinger adds:

Mr. Babson is indeed an interesting figure; I have been meaning to get around to his autobiography for a decade or more. Specs may want to check out his Business Barometers for Anticipating Conditions, first edition 1909, I have the 23rd, 1933. There appears to have been an edition a year from 1909 onward. Of additional interest is Business Barometers for Profits--Security--Income. First published in 1940, I have the eighth edition, 1958. A highlight of the former work is a foldout table comparing nine stock-market panics from 1837 through 1930. There are also some "Babson Charts" that depict the early development of his ideas.

These older investing tomes are often interesting works that illuminate the analytical processes of our forebears. Many of the ideas represented are no longer applicable and many are used today in improved (?) form, but, most importantly, these older works can be a rich source of ideas for the inquiring Spec.

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