This past week I read Josh Brown and Jeff Macke’s new book Clash of the Financial Pundits (New York: McGraw-Hill, 2014).
One of the most interesting chapters was about when investment manager Martin Zweig appeared on Louis Rukseyser’s Wall Street Week on Friday, 16th October 1987, and predicted a stockmarket crash. You can see Zweig’s prediction in the above clip, 6:38 to 8:36 minutes. In the clip Zweig uses a combination of analogical reasoning about past market crashes, and observational studies on current market events and money flows.
Black Monday occurred on Monday, 19th October 1987.
Zweig was a PhD graduate and econometrics expert who also influenced the trend-following trading subculture. Zweig coined two phrases — “Don’t fight the Fed” (Federal Reserve) and “The trend is your friend” — which influenced momentum and trend-followers. George Soros trader Victor Sperandeo adopted the first phrase; popular trading culture adopted the second phrase — often without original attribution. This is how rumours work through virality and social contagion.
The difference is that Zweig had expertise and skills that set him apart from retail traders, and from momentum / trend-followers.
A few years ago I found a copy of Zweig’s book Winning on Wall Street (New York: Grand Central, 1986 / 1990). It’s an interesting artifact from the Masters of the Universe period (Tom Wolfe) of 1980s Wall Street. I rank it alongside George Soros (The Alchemy of Finance) and Peter Lynch (One Up on Wall Street) as a personal theory of financial markets and a codified trading methodology.