Pictures change minds. Pictures can also "make up" minds that are unsure.
When you read the phrase "Raising the flag on Iwo Jima," you may need a couple of seconds to recall the reference. Not so if you see the famous WWII photo. It's instant recognition.
Likewise the "Tank Man in Tiananmen Square." If you see the image, you need no reminder that he was the brave Chinese student who stood down a column of tanks in Beijing in 1989.
Other images arouse the opposite of inspiration. Kent State. My Lai. Abu Ghraib. You get the idea.
Now, I can't provide a "visual" that makes as lasting an impression as those iconic images. Yet I do have one that is powerful. It's relevant to our time. It challenges a long-held orthodoxy. And it tells a story that should indeed change or help make up the minds of individuals who think for themselves.
The orthodoxy it challenges is an academic theory which goes by the name "random walk," or efficient market hypothesis (EMH). This theory was the crown of modern finance theory for a generation and basic to the research that won three Nobel Prizes in Economics (1985, 1990, 1997).
There are book-length definitions of EMH, but the bare-bones version is that the stock market is efficient, investors are rational, and equity prices reflect all publicly available information. Therefore, say EMH advocates, price movements are "random." No one can know the market's trends and turns for a given day, month, or year. Yet they also say stocks go up in the long term, so investors can profit from a buy-and-hold strategy.
The past decade has made a mockery of the EMH. It allows for small price declines, but it cannot account for that chart. Two large bear markets in one decade, with S&P 500 prices showing a loss the vast majority of the period? That is inefficient and irrational in the extreme.
Bear markets can last for years at a time, as happened in the U.S. in the 1970s. Japan has been in a bear market for more than 20 years. Crowd behavior is not an exception in the market. It's the dominant force behind every major turn and trend.
The past decade confirms the work of someone who first challenged the financial orthodoxy more than three decades ago, specifically in April 1977. As a young technical analyst at Merrill Lynch in New York, his research circulated among several of Merrill's clients. His name for these studies was the Elliott Wave Theorist. His April '77 study was a detailed analysis of the 1975-76 stock market, and it offered this comment on the random walk:
"If market moves are arbitrary (as the random walk proponents suggest), then internal components would rarely 'make sense' mathematically, and then only by statistically insignificant fluke occurrences. However, there seems to be enough evidence that mass psychology, as recorded in the Dow Jones Industrials, form patterns that are uncannily interrelated....At least this much can be fairly reliably stated as a result of this work: This idea that the market is a 'random walk' is probably false."
Robert Prechter left Merrill soon after; he has published the Elliott Wave Theorist in every month since.
Yes, "mass psychology" does "form patterns." This truth explains the financial downturn that began in late 2007. Prechter's Elliott Wave Theorist anticipated the crisis and warned subscribers beforehand. Likewise, he alerted them to the bear-market rally that began in March 2009.