 Ralph
Nelson Elliott
Ralph
Nelson Elliott was of that rarest of breeds, a true scholar in the
practical world of finance. Financial analyst Hamilton Bolton
accurately described the enormity of Elliott's feat when he said
that "he developed his principle into a rational method of
stock market analysis on a scale never before attempted."
Brilliant and persistent, Elliott reached his ultimate achievement
late in life by a circuitous route that included fortune in the
disguise of disaster.
Elliott was born on July 28, 1871 in Marysville, Kansas, and later
moved to San Antonio, Texas. Around 1896, he entered the accounting
field, and for twenty-five years held executive positions primarily
with railroad companies in Mexico and Central America. By rescuing
numerous companies from financial difficulty, Elliott earned a
reputation as an expert business organizer. Finally, in early 1920,
he moved to New York City.
Elliott’s specialty made him the perfect choice for one of the
U.S. government’s international projects. In 1924, the U.S. State
Department chose him to become the Chief Accountant for Nicaragua,
which was under the control of the U.S. Marines at the time. In
February 1925, Elliott began applying his experience in corporate
reorganization to reorganizing the finances of an entire country.
When the U.S. extricated itself from Nicaragua, Elliott moved to
Guatemala City to assume another corporate executive position:
general auditor of the International Railway of Central America.
During this time, Elliott wrote two books: Tea Room and Cafeteria
Management, published in August 1926 by Little, Brown &
Company, and The Future of Latin America, an analysis of the
economic and social problems of Latin America and a proposal for
creating economic stability and lasting prosperity in the region.
With one book sold and the second one under consideration, Elliott
decided to return to the United States to set up an independent
management consulting business. It was around this time that he
began to feel the symptoms of an alimentary tract illness caused by
the organism amoeba histolytica that he contracted Central
America.
Elliott's reputation, built upon a distinguished career, his new
book, and a long list of references, was soaring. Book reviews were
favorable, he was in demand as a speaker, and his consulting
business was beginning to grow. Just when Elliott's future appeared
its brightest, however, his illness suddenly worsened. By 1929, it
had developed into a debilitating case of pernicious anemia, leaving
him bedridden. The adventurous and productive R.N. Elliott was
forced into an unwanted retirement at the age of 58. Several times
over the next five years, he came extremely close to death.
Elliott needed something to occupy his mind while recuperating
between the worst attacks of his illness. It was around this time
that he turned his full attention to studying the behavior of the
stock market.
Investigating the possibility of form in the marketplace, Elliott
examined yearly, monthly, weekly, daily, hourly and half-hourly
charts of the various indexes covering 75 years of stock market
behavior. In doing so, he was fulfilling a mission that he had
enunciated for all responsible men in his manuscript on Latin
America: "There is a reason for everything, and it is [one's]
duty to try to discover it."
In May 1934, two months after his final brush with death, Elliott's
observations of stock market behavior began coming together into a
general set of principles that applied to all degrees of wave
movement in the stock price averages. Today's scientific term for a
large part of Elliott's observation about markets is that they are
"fractal," coming under the umbrella of chaos science,
although he went further in actually describing the component
patterns and how they linked together. The former expert organizer
of businesses had uncovered, through meticulous study, the
organizational principle behind the movement of markets. As he got
more proficient in the application of his principles and corrected
initial errors in their formulation, their accuracy began to amaze
him.
By November 1934, R.N. Elliott's confidence in his ideas had
developed to the point that he decided to present them to at least
one member of the financial community: Charles J. Collins of
Investment Counsel, Inc. in Detroit.
Collins had traditionally put off the numerous correspondents who
offered him systems for beating the market by asking them to
forecast the market for awhile, assuming that any truly worthwhile
system would stand out when applied in current time. Not
surprisingly, the vast majority of these systems proved to be dismal
failures. Elliott's principle, however, was another story.
The Dow Jones averages had been declining throughout early 1935, and
Elliott had pinpointed hourly turns by telegram with a fair degree
of accuracy. In the second week of February, the Dow Jones Rail
Average, as Elliott had previously predicted, broke below its 1934
low of 33.19. Advisors were turning negative and memories of the
1929-32 crash were immediately rekindled as bearish pronouncements
about the future course of the economy proliferated. The Dow
Industrials had fallen about 11% and were approaching the 96 level
while the Rails (a more important average then) had fallen 50% from
their 1933 peak to the 27 level.On Wednesday, March 13, 1935, just
after the close of trading, with the Dow Jones averages finishing
near the lows for the day, Elliott sent a telegram to Collins and
flatly stated the following: "NOTWITHSTANDING BEARISH (DOW)
IMPLICATIONS ALL AVERAGES ARE MAKING FINAL BOTTOM."
Collins read the telegram
on the morning of the next day, Thursday, March 14, 1935, the day of
the closing low for the Dow Industrials that year. The day prior to
the telegram, Tuesday, March 12, marked the 1935 closing low for the
Dow Jones Rails. The thirteen month “correction” was over, and
the market immediately turned to the upside.
Two months later, as the market continued on its upward climb,
Collins, "impressed by [Elliott's] dogmatism and
accuracy," agreed to collaborate on a book on the Wave
Principle suitable for public distribution. The Wave Principle
was published on August 31, 1938. The first chapter makes the
following statements:
No truth meets more
general acceptance than that the universe is ruled by law. Without
law, it is self-evident there would be chaos, and where chaos is,
nothing is.... Very extensive research in connection with... human
activities indicates that practically all developments which
result from our social-economic processes follow a law that causes
them to repeat themselves in similar and constantly recurring
serials of waves or impulses of definite number and pattern... The
stock market illustrates the wave impulse common to
social-economic activity... It has its law, just as is true of
other things throughout the universe.
Within weeks after the
publication of his ground-breaking book, Elliott packed up his
belongings and moved to an apartment hotel in Columbia Heights,
Brooklyn, a short subway stop from Manhattan's financial district.
On November 10, he published the first in a long series of
Interpretive Letters that analyzed and forecasted the path of the
stock market. Ralph Elliott was finally back in the saddle, and as
independently in business as he had planned eleven years before. In
early 1939, Elliott was commissioned to write twelve articles on the
Wave Principle for Financial World magazine. These articles
established Elliott's reputation with the investment community, and
led to his publishing a series of "Educational Bulletins."
One of these was a ground-breaking work that lifted the Wave
Principle from a comprehensive catalog of the market's behavioral
patterns to a broad theory of collective human behavior that was new
to the fields of economics and sociology. By the early 1940s,
Elliott had fully developed his concept that the ebb and flow of
human emotions and activities follow a natural progression governed
by laws of nature. He tied the patterns of collective human behavior
to the Fibonacci, or "golden" ratio, a mathematical
phenomenon known for millennia by mathematicians, scientists,
artists, architects and philosophers as one of nature's ubiquitous
laws of form and progress.
Elliott then put together
what he considered his definitive work, Nature's Law -- The
Secret of the Universe. This rather grandly titled monograph,
which Elliott published at age 75, includes almost every thought he
had concerning the theory of the Wave Principle. The book was
published June 10, 1946, and the reported 1000 copies sold out
quickly to various members of the New York financial community. Less
than two years before his death, Elliott had finally made his mark
upon history.
As a result of Elliott’s pioneering research, today, thousands of
institutional portfolio managers, traders and private investors use
the Wave Principle in their investment decision making. Ralph
Elliott undoubtedly would be gratified to see it.
This article was
excerpted from a detailed 64-page biography in R.N.
Elliott’s Masterworks (New Classics Library, 1994).
This book contains all of R.N. Elliott’s books and articles, plus
highlights from his market letters.
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