’m sure the market is going lower, absolutely sure. There isn’t one good reason for it to go up. Are youtelling me that I should voluntarily stand pat and lose moremoney? Let’s at least get out and, once prices move lower, wecan get back in. Do what I tell you or I’ll get a new advisor whocan see what’s happening.When investors reach a point of certainty or conviction, they act onthat certainty. To ask them to do otherwise—to refrain from action atthose moments—is like asking them not to turn the steering wheel toavoid the train they see coming right at them, whether that train is realor not.Therefore, it is my belief that market timing is a more natural investment strategy to use than the buy-and-hold method. As an addedbenefit, once investors are willing to consider market timing and give ita try, they now have the luxury of thoroughly planning what kind of timing strategy to use. This advance planning should help investors sidestepmarket timing based on emotional decisions that truly do destroy investor confidence and investment returns.As mentioned, market timing is much more difficult to execute thanthe do-nothing approach of buy and hold. To do market timing, you haveto establish an opinion about what is going to happen in the market. Youneed a basis to believe that the market is now ready to go up or go down.You also have to know that there are times when no opinion is possible,the market is unpredictable, and no forecast should be made. To do thesethings you have to know when and how to develop an investment opinion.
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DEVELOPING AN INVESTMENT OPINIONStock market investing, or speculation, is one of the most exciting activities you can undertake. The word speculation comes from the Latinword speculare, which means “to look.” The problem is that there aresimply too many things to look at. Stacked top to bottom, one page at atime, Wall Street probably produces over 20 feet of data on any giventrading day. Lack of data is not the problem—in fact, the problem is theopposite: the overwhelming volume of data and not knowing what is important and what isn’t. Without realizing that more than 99% of the dataon Wall Street are immaterial to an investment decision, most peoplesimply get lost in the confusion of too much information.Most investors think that to make timely, correct investment decisions, you must pore over this mountain of data and know many facts. Ihave found that the opposite is true. You achieve insight by simplifyingyour thinking, by focusing on only a few important points and never deviating from those points. You do this by continually discarding the mountain of unnecessary information to find the few important concepts.Early in my studies, I had a friend who used more than 100 indicators to analyze the stock market. At first, I envied his superior knowledge, but eventually I came to feel sorry for him: He was alwaysconfused. I finally figured out that he simply had too much information.At any given time, only one or two points were vital, and the rest justserved to divert his attention to unimportant and contradictory data. Hehad never learned that the secret to a clear and accurate picture of themarket is finding the few truly important pieces of information anddownplaying or discarding everything else.
Holding to an Investment Viewpoint or PositionHolding to an investment viewpoint or opinion is very similar to theaction of anchoring yourself at a location against a physical force. Ifyou are facing a strong wind, you have to anchor your feet in firmground or get blown away. Similarly, when you hold a market viewpoint, that viewpoint must be anchored in facts and theories thatyou know are correct and true. You must solidly believe them, and
DEVELOPING AN INVESTMENT OPINION
they must be founded on established and tested ideas. Otherwise,you will not be able to hold to your investment position, and yourviewpoint will flip-flop in the face of almost any concept or compelling idea that comes along.I remember the first time I saw this happen in myself. It was embarrassing how flimsy my ideas proved to be and how vulnerablethey were to contradictory evidence. Although much of my wavering was attributable to age and inexperience, I wasn’t used to seeingit in myself. I stood there amazed as I watched my opinions flip-floplike a rag doll throughout the day.That time was October 1971, after Nixon had announced wageand price controls. I had just become interested in the stock marketand was working at night, watching the stock market every day onthe new stock market channel, KWHY, in the Los Angeles area. I waslearning by reading books and listening to brokers, commentators,and economists discuss the economy and the market.Prices had rallied for 2 weeks after Nixon’s announcement, andI became, like everyone else, bullish. Then, the market started a mildsell off that soon stopped. I expected prices to begin a major rallyand so bought two stocks—my first trades in fact. In a few days, themarket started to decline again, and then the selling really startedto pick up steam. It declined almost every day, and I started to getnervous.I began listening in earnest to every commentator, trying to understand what was happening. On one particular day, I got bullish,bearish, then bullish again, agreeing each time with the bullish orbearish arguments of each commentator who came on the air. Myideas were like papier-mâché against almost any idea.I wasn’t used to this. I had studied mathematics and the physical sciences, and in these disciplines there is always one clear answer.Now, I was unable to hold to my ideas against almost any other ideathat was expressed. It was obvious to me that I didn’t know anything. If I was to become successful, I would have to establish for myself what was important and what wasn’t. Only then would I be ableto say, “That’s balderdash,” or “That is important.” It would take alot of study, experience, practice, and application.
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Finding Out What Is ImportantCountless books have been written on technical analysis. The majority ofmarket technicians have read them all, and yet history usually finds themholding wrong opinions at critical market junctures. The problem isn’twith the information in these books—the basic data and theories arecorrect. The problem is that the books often omit the practical instruction on how to apply the information in real time. For example, whentwo important indicators are pointing to opposite scenarios for the market, how do you determine which one to choose?Stock market books seldom address this question, but it is key to thewhole activity. I’ll tell you the answer: To achieve understanding, youmust find out what is truly important, rank the data by relative importance, and then learn how to fit the rankings together to see the correct stock market story. Yes, stock markets do tell stories through theirprice action. The art is learning how to use the available statistical information to figure out the story. The friend I mentioned previously failedbecause the books never instructed him on how to put all 100 indicatorstogether to see what that story is. He became immersed in all the indicators, looking for some great truth. He missed the idea that these wereonly clues to help uncover the story the stock market was telling.Evaluating the relative importance of data is extremely important.Much of the information that Wall Street uses to think with is simplywrong or not really vital. Without correct information or informationthat is correctly evaluated, you can’t reach correct conclusions. Moreover, sometimes because of excessive publicity, it is very difficult to evaluate a fact: The data have been made to appear more important—or lessimportant—than they are. This distortion, too, can make it difficult toreach correct conclusions.Following are two examples. The first concerns the current popularidea about the strength of the baby boomer wave. The second concernsthe question of whether stock prices are controlled by an invisible set ofinsiders.The Baby Boomer MisconceptionWhenever I see an idea that has wide acceptance in the investment community, I start looking for the holes in it. I do this because of my deep belief in the theory of contrary opinion (explained in Chapter 5). When Isaw Wall Street fall in love with the idea that the baby boomer wavewould drive stock prices higher for another 8 years, I got very interested.At a seminar where a hundred brokers were listening to this idea, I saw
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almost every head nodding in agreement. So I did my own study of thesituation.The baby boomer idea is a simple one. It holds that money drives thestock market and that the expanding number of baby boomers reachingtheir prime investment and buying years (ages 45 to 48) is a huge, irresistible force that will drive stock prices higher for a long time. Figure 1.2shows the correlation between stock prices and the number of peopleturning 45. The idea is that age 45 is generally the point at which a person has the greatest purchasing power. This buying is good for businessand translates to higher prices for stocks. Forty-five is also the age whenthe average person starts saving and investing the maximum amount, asthey approach retirement. The way the stock market seems to follow thepopulation curve is uncanny. The chart leads people to these conclusions:• The baby boomer wave is very large.• There is a strong correlation between stock prices and the numberof people turning 45.• The stock market will continue to rise until the year 2007.This chart makes a strong visual impact and can create unswervingconviction about the power of the baby boomer wave. Both the plausibility of the idea and the strong correlation between the two curvesgive the baby boomer idea its wide acceptance and apparent importance.FIGURE 1.2 The popular baby boomer wave graph, which shows the numberof people turning 45 plotted against the inflation-adjusted S&P 500.
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Notice that the baby boomer idea does not consider the possibility thatstock prices may already be too high. The concept is simple: With a largenumber of people turning 45, stock prices will continue to rise due totheir sheer buying power.When I started studying the baby boomer data, the first thing I noticed was that the Y-axis started not at zero but at 2.25 million births.This had the effect of making the births after WWII look larger than theyreally are. More importantly, I concluded that the chart plotted thewrong item. The more important and accurate item to plot is the percentage of the population turning 45, not the actual number. Certainly,1 million people turning 45 when the population is 300 million (1⁄3%) isless important than 1 million people turning 45 in a population of 100million (1%). As the population gets larger, a larger number of peopleare needed to produce a comparable economic impact. I calculatedthe percentage of the population turning 45 and graphed that against thesame inflation-adjusted S&P 500.Figure 1.3, plotting the percentage of the population turning 45against the stock market, presents an entirely different picture:
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• The baby boomer wave exists, but it’s much smaller and less important than many people think.• The wave might be peaking right now.Therefore, the idea of the stock market constantly advancing against awave of baby boomers is far overrated. If the stock market is too high andthe economy is facing real economic problems, prices can and will decline—and decline severely. In fact, this baby boomer idea has all theclassic signs of an old pattern: Near the top of a major bull market, a newidea emerges that convinces people that a new era has arrived and thatbear markets are a thing of the past.Stock market lore holds that every great bull market generates suchideas. (Because of it, well-schooled investors usually greet the emergence of a new era as one of the classic signs of a bull market end.) Thenew era always signifies a new viewpoint and originates from the uniqueideas and apparent new economy of each period. The new era appears sopowerful and so obviously right that a bear market seems almost impossible. Investors usually ignore any negative ideas because they seem sounimportant when viewed against the new economic viewpoint and because they think any correction will be relatively mild. As soon as a correction continues and slips into a major bear market, people’s thoughtsabout stocks shift, and the fallacy in the idea is soon uncovered.
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FIGURE 1.3 The percentage of the population turning 45 plotted against aninflation-adjusted S&P 500. This chart shows that the baby boomer wave is notas important as some have said.
Do Insiders Control the Market?One of the most persuasive—and pervasive—of the old ideas is the theory that stock prices are controlled and manipulated by a large and powerful group of insiders. Over the years, I’ve investigated this idea in itsmany guises—from corporate insiders, to mutual fund money managers,to stock exchange specialists—and I have always found it to be false.My first contact with this idea came in 1971, when it was popular toassume that the specialists on the floor of the exchange control stockprices. All orders to buy and sell are processed through a specialist, whomatches and executes all incoming buy and sell orders for a stock. Thespecialist also has the famous black book. This book (now a computer)contains all the orders made away from the market that clients have entered with their brokers—orders to buy or sell if the stock hits a certainprice. With these data, the specialist knows at what price heavy demandand heavy supply will occur.Besides matching up orders, specialists are also charged with buyingand selling in their own accounts to help stabilize prices if supply and demand get out of balance. Because specialists trading for their own accounts can amount to approximately 20% of the daily trading volume,this is significant. The black book and insider trading led to the belief
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that specialists control stock prices to their advantage. At one time, a specialist short-selling indicator seemed to prove this contention. However,by 1974, after a careful analysis of specialist data, I was able to prove tomyself that this is not the case. The specialist data and the indicator thattechnicians had invented were not measuring what technicians thoughtthey were. It is an example of a conclusion based on a mistaken concept.Therefore, I became convinced that floor specialists do not control pricemovements over the intermediate or long term. As I analyzed more andmore information, I came to similar conclusions about other forms ofpossible insider manipulation.It was once true that markets were manipulated and conspiracieswere possible, but no longer. Furthermore, holding to the viewpoint thatprices are controlled and manipulated by insiders is destructive to correct market thinking. It is destructive because it puts the cause of stockprice movements, and therefore your ability to predict these movements,outside your perimeter of knowledge. When you discover, by carefulanalysis, that prices are not manipulated, you are somewhat free; you arefinally in a position to figure out what is really happening in the stockmarket.
Daniel Drew, Robber BaronDaniel Drew was the king of stock manipulation and short selling—one of the infamous robber barons of 200 years ago. His story illustrates how it used to be.Daniel Drew was born in New England around 1800. A man oflow business ethics, he prided himself on the swindle. Oneidea he invented was that of watering the stock. As a youngcattle drover, he would deliver a large herd and then have hismen lay out salt for the cows to lick. The next morning he allowed the thirsty cows to drink until they almost burst. Thebutchers, faced with the fattest cows they had ever seen, paidtop dollar.Later, Drew gained control of the Erie Railroad and becamerich by manipulating Erie stock. He would sell the stock shortand then release bad news about the company. After the price
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fell, he would profit by buying back the shares at the low price.He would then release good news. He did this repeatedly until,after 10 years, the Erie was almost bankrupt and Drew was arich man.He also participated in one of the most colorful financialbattles in American history. Commodore Vanderbilt got tired ofthe Scandal of the Erie and decided to buy the company awayfrom Drew by secretly purchasing a majority of shares on theNew York Stock Exchange. Drew, with the help of Jim Fisk andJay Gould, fought back. Using the company printing press, thethree printed illegal shares of Erie, flooding the exchange withcounterfeit stock as Vanderbilt’s brokers purchased every sharein sight. On learning that he held worthless stock, Vanderbiltsent the law after the trio, who now had his money. The threewent to New Jersey, bribed state officials, and fended off theVanderbilt legal attack. Eventually, they returned Vanderbilt’smoney and he abandoned his efforts to buy the Erie.A while later, Drew, having again shorted Erie stock, wascaught in one of his own traps. Jay Gould, Drew’s former sidekick, wiped him out by manipulating the price higher, therebyforcing Drew to buy back stock at astronomically high prices.The era of the robber barons is long gone now, and the useof inside information and the release of misleading data to manipulate stock prices are now illegal. There is no longer a powerful they who can control stock prices. We don’t know howinvestors survived in an environment like that, but somehowthey did, long enough to bring about the reforms that createdthe fairer markets we enjoy today. (Source: Kean Collection/Archive Photos™.)
WHAT’S COMING NEXT?Market timing presents the purist with a major theoretical problem. Thestandard academic models for stock prices hold that stock prices are basically random and unpredictable. If I and many others believe that market timing is possible, we must have a different model in mind than these
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academic models. Chapter 2 introduces the stock market model that Iuse to understand price movements. It allows for a stock market that issometimes predictable and therefore makes market timing possible.The model provides further benefit in its ability to align and unifyother stock market information that was previously confusing or in conflict. For example, for years an argument has raged between the markettechnician and the market fundamentalist about whose discipline is better at predicting the stock market. As you will eventually see, both disciplines are correct when applied to the correct time scale.During a long bull market, when the buy-and-hold philosophy worksso well, it is not so important to clarify these points. During a tradingrange market, it is vital. To time the market successfully, you must establish two points: (1) the expected size and time scale of the price movesyou want to catch and (2) methods to determine when the market hasshifted from a random state into a predictable one. This requires skill andexperience and—most importantly—a willingness to change your mindwhen you are wrong. You must learn how to do this in such a way thatyour confidence in your own judgment is not undermined.What follows in this book is my understanding of what it will taketo be successful through a market environment like this. I address theinvestment tools that I have come to use during 30 years of market study.If you are going to be successful through a market like the one I’m expecting, you will have to use many tools.The following chapters explain how I use information to do this. InChapter 3, you learn the role of the fair-value term D/I in this model.Chapters 4 and 5 explore the area of technical analysis, as well as why itcan help locate unstable markets that are ready to undergo a strongfeedback-loop movement. In Chapter 6, you’ll see how new discoveriesin chaos theory help explain the fractal nature of stock price charts andhow they give a firmer theoretical foundation for the controversialElliott wave theory.Chapter 7 broadly outlines the pattern the market may make duringits expected long sideways run. Chapter 8 presents certain studies I dida few years ago on strategies for sideways markets. These studies backtest various moving-average methods and how they performed on paperthrough the last trading range market, from 1966 to 1982. Alternative investments, such as hedge funds, are also discussed.
2A New StockMarket Model
SOLVING THE BIG THEORETICAL PROBLEMStandard academic models for the stock market hold that stock prices areessentially random and unpredictable. Because of this, whenever peopleset about predicting the stock market, they are essentially disagreeingwith these accepted models. Not having an answer, most analysts andcommentators just keep writing their predictions, silently ignoring theparadox. Even if one accepts that these standard models are inaccurateand prices are sometimes predictable (as I do), there is another problem.The investing public and Wall Street employees demand that analysts always have an opinion about the stock market. Even if an analystbelieves that the market is predictable only at certain points, he or she isforced to express an opinion all the time to satisfy this need, knowing fullwell it is impossible to do. If analysts spoke only when they saw a verypredictable market and refused to speak when they thought it was random, there would be more success.There are many great technicians and market analysts who areskilled enough to accurately locate the beginning and end of the majorprice moves, with only a few false starts. I know this because I’ve seenthem do it for the past 30 years.
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In this chapter, with the help of a few ideas from chaos theory, I introduce the model I have come to use for the stock market. I believe thismodel is more accurate than the efficient market model, is closer to thebeliefs of most traders, and allows for a sometimes predictable market. Ifthis model is somewhat correct, one of the arts of investing is knowingwhen the market is predictable and when it is truly random.The terms used in this model—fair value and feedback loops—havebeen expounded on by many other writers and used in other models.The form of the model that I present is, as far as I know, unique.
WHAT IS A MODEL?What is a model? A model is either a mental construct or a physical systemthat is thought to behave in a similar way to the actual system under study.An effective model of the stock market would act parallel to the actualstock market, thereby allowing you to gain insight into what is happening.The Old ModelAcademicians generally use models developed from ideas tested in the1960s and 1970s. One of the ideas postulated in these early models wasthat the market is highly efficient. An efficient market model says that thecurrent price reflects everything that is known about a company and thatlarge investors immediately react to any fresh economic news, adjustingprices to fair value almost instantaneously. Therefore, you can never geta leg up on the market. Any price deviation brought about by irrational investor activity is quickly brought back to fair value by the rationally informed. One conclusion from the efficient market model was that stockprices are fundamentally random and unpredictable, and therefore, youcan’t beat the market. Gordon Malkiel popularized this standard investment model in a book called A Random Walk down Wall Street.
A model is a mental construct or physical system that parallels or behaves like a real system. Studying the stock market model providesinsight into and an understanding of how the stock market actuallybehaves.
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What’s Right with the Old ModelAlthough I never really agreed with the efficient market theory when Ifirst read about it in 1971, I did agree with one concept that came out ofit. The concept is that it is hard for an analyst or an investor to select aportfolio of a few individual stocks that will do better than a large indexof stocks. What this means is that the portfolio that gives the best gainswith the least risk is a portfolio of all stocks or an index of a large number of stocks. My immediate agreement came from my knowledge of ananalogous problem in physics. Let me explain.One subject that physicists study is the behavior of gases (e.g., oxygen, hydrogen). The starting assumption is that the gas consists of millions of free molecules, all moving very fast in short, straight lines untilthey bang into one another or against the walls of the container, ricocheting off in a new direction. To understand this situation, physicistsdon’t attempt to apply Newton’s equations of motion to each moleculeand then add it all up to calculate the sum total. That is much too difficult. What they do is come at the problem statistically and figure out theaverage effect—the total effect of a bunch of them acting en masse. Inother words, the behavior of a single molecule is unpredictable, but thebehavior of a large number of them, acting together, is predictable.Let me explain this in greater detail. Suppose a tiny molecule flies upagainst the wall of the container and bounces away, much as a billiardball bounces off the rails of a pool table. This reversal in direction (momentum) of that tiny molecule causes a little kickback against the wall,just as the billiard ball kicks against the billiard table rail. It is impossibleto calculate when any particular molecule is going to fly up against thewall and give it a little kick. However, we can calculate with some certainty that, in any given second, a certain number of molecules will probably hit the wall. The sum of all these little molecular kickbacks everysecond is the large-scale effect we experience as the pressure of the gas.In physics, this theory of statistical mechanics states that although wecan’t know what any individual molecule is going to do, we can still knowsomething about what a lot of molecules will do en masse. That behavioris predictable.When I started my studies years ago, I assumed that this theory wasprobably true of the stock market and I asked the following question: Ifstock prices are predictable, does that predictability lie with being able topredict the performance of an individual stock or that of a bunch of
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stocks en masse (i.e., the stock market)? I guessed that if the stock market is predictable, that predictability would be found in forecasting theoverall stock market, not an individual stock.Therefore, this book presents no stock-picking methods. I believeyou’ll be more successful if you look for predictable periods in the overall trend of the market and then ride with it by buying an index of themarket or a large diversified fund. If you can’t be successful at that, youwill probably not be successful at predicting the direction of individualstocks. The book is based on this assumption.What’s Wrong with the Old ModelPeople who made their living trading the market on a daily basis oftendisagreed with the traditional academic models. Most experiencedtraders had seen markets that were predictable or that sometimesseemed to be, so the efficient market model didn’t match their experience. The traders found it very difficult to describe their experiences andperceptions to the academicians. The statistical mathematics used inacademia often seemed to obscure the realities that traders had observed(statistical mathematics can often obscure subtle but important points).One assumption in the efficient model is that any price disturbanceaway from fair value, created by emotional or irrational investor activity,is small and is quickly neutralized by the large rational investors. Thisseemed like a reasonable assumption. In fact, it was the same assumptionthat physicists and engineers had been making in their disciplines foryears. They, too, had assumed that if you created a small disturbance ina physical system, that disturbance would quickly disappear, being dispersed or carried away by frictional forces or something. They couldn’tprove this assumption since the mathematics were too difficult, but itseemed likely. All this changed in the in the 1970s and 1980s, as mathematicians and physicists made new discoveries. They slowly found thattheir assumption wasn’t always true, and that given the right conditions,small disturbances can actually go the other way; at certain times theycarry forward and magnify into very large disturbances.The finance professors knew the efficient market model wasn’t quiteaccurate, but they assumed that it was accurate enough to be a practicalmodel. They made the same mistake that the physical scientists hadmade, assuming that small price disturbances that carried prices awayfrom fair value would quickly return to fair value. Now this was in doubt.These discoveries confirmed what many traders had been trying to de-
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scribe, that irrational price activity is often a much bigger effect than previously thought, and not so easily dismissed. Sometimes prices take on alife of their own and the irrational movements become much larger andmore important than originally thought. Many of these basic discoveriesin physics, mathematics, and finance were explained and eventually classified under the heading of chaos theory, which Gluck made popular inhis excellent book, Chaos.Adding a Little Chaos to the Model: The Feedback LoopTo understand how chaos enters the picture, we must take a closer lookat something called a feedback loop. Feedback loops are a fundamentalconcept in various branches of chaos theory and are very importanthere, too.By the way, the theory of chaos doesn’t hold that everything is chaotic,as the name might imply. Chaos theory slowly emerged when scientistsin a number of unrelated fields started finding hidden order in a varietyof systems originally thought to be chaotic. Scientists soon recognizedthat concepts such as exact order and total chaos were absolute conditions never really found in nature, and that real physical systems existedsomewhere between the extremes. At times, systems with a lot of chaoticmotion naturally dampen down and become orderly, whereas orderlysystems, when slightly disturbed, often become very chaotic. Chaos theory arose as a way to define something that comprises both order andchaos and that provides ways to determine when a model can ignore oneor the other. A key concept behind this type of behavior is called a feedback loop.Because feedback loops are so important in understanding my newmodel and because the best way to explain a feedback loop is to give youa few examples of it, let’s look at two very common ones. The first is probably the clearest and simplest example. The second is a physical situation,with feedback loops very similar to those found in the stock market.You’ll certainly recognize the first example (Figure 2.1). When listening to a lecture that uses an amplification system, have you ever heardthat screeching sound when the volume is too high? Everything is goingalong fine, and then a terrible loud noise overwhelms the audience. Thisis a feedback loop in action. Sound enters the microphone, goes to theamplifier, and comes out of the speakers at a higher volume. This amplified sound, besides entering the listeners’ ears, also reenters the microphone. If the volume knob is set high enough, the amplitude of the
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FIGURE 2.1
A common feedback loop—the screeching sound system.
Speaker
Amplifier
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Microphone
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sound reentering the microphone is higher than the original sound. Thiscycle repeats, the sound building and building, until you hear that terrible screech. Even if the lecturer stops talking, the sound continues. Thelecturer initiates the sound, but once the feedback starts, it continuesand builds on its own, feeding on itself. When you understand the concept, you can find many examples of feedback loops in nature. One thatis very similar to the feedback loops found in the stock market is thephysical situation of an avalanche.The pre-avalanche condition starts with a large blanket of snow onthe side of a mountain. The blanket grows as more and more snow falls,yet nothing happens. Although you can’t see it from the surface, weather
A feedback loop is an energy system that occurs naturally or by design in which some of the energy or disturbance produced comesback, adding to the system’s ability to create or direct more energy.A feedback loop is a self-amplifying effect.
WHAT IS A MODEL?
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and the pressure of the accumulating snow is causing the crystallinestructure of the snow to become unstable. All that is needed is a triggering event. One day, a small bird lands at the top of the snow bank andbreaks a little piece free, which triggers the underlying instability. Thesmall piece of snow falls and loosens a larger chunk below it. This chunkfalls on the snow below it, breaking even more snow free. Finally, an entire hillside of snow cascades and falls to the base of the mountain (Figure 2.2). After the avalanche has occurred, the hillside is stable. Althougha bird could trigger an avalanche when the snow bank is unstable, 20
FIGURE 2.2 The avalanche is a feedback system very similar to the type foundin the stock market. Once a major instability has been triggered, it can feed andbuild on itself.
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stomping elephants couldn’t start one when the snow is stable. It will notcollapse until enough new snow has fallen on the hillside to make it unstable again.The important concept to understand here is that the cause of theavalanche is the avalanche itself. In all feedback loops, the rapidly repeated movement that creates the ongoing effect is caused by the structure of the system, not by the triggering event. Although a bird triggeredthe first movement, its continuation