BabSon Trading

The Cutting Edge in Trading Technolgy

Dr Andrews Discusses his Friend Roger Babson 

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 article at Macro Matters

Roger Babson was at the New York stock exchange on March 14, 1907, at the request of a friend. The market had started a drop from a high of 111 on March 6, 1907 on the way to a low point of 60. Much of the drop occurred on March 14. “On that day I actually saw men’s hair turn gray.” Roger wrote in his autobiography.

It motivated him to do a study of stock exchange transactions and what he referred to as foolish investments. He came to the conclusion that the cost to even thrifty investors was one and a half billion dollars a year at that time. At that point he made a life changing decision, to do something to prevent the losses. It put him on the path, which resulted in the founding of Babson Business Statistics, Babson Business College and the Gravity Research Foundation.

Prior to Babson graduating from M.I T. in 1898 he sat in Professor Swains Civil Engineering class. To make the class more interesting, Professor Swain used stock market charts to illustrate the application of Isaac Newton’s laws – particularly of the law of action and reaction. Babson used the exercises learned in the class to develop his method of analyzing the stock market and investing, subsequently making his fortune as a financial advisor and investor.

Roger Babson, himself said that his interest in gravity started with the childhood drowning of his older sister in a river near Gloucester, Massachusetts. In an essay called “Gravity- Our Enemy No. 1,” he wrote, “She was unable to fight gravity, which came up and seized her like a dragon and brought her to the bottom

One of the things he valued throughout his life was learning about the British scientist, mathematician, and philosopher, Isaac Newton. Roger Babson was impressed by Newton's discoveries, especially his third law of motion--"For every action there is an equal and opposite reaction." He intuitively combined Newton’s various laws of motion, and focused upon the easiest to explain to the public, which was the third law of motion. He eventually incorporated Newton's theory into many of his personal and business endeavors. Later in this article the reader will see how specifically Newton’s Action Reaction theory is applied to trading.

Upon graduating in 1898, Roger knew for certain that he preferred an alternative career. His father Nathaniel Babson counseled Roger to find a line of work that would ensure "repeat" business indefinitely. After careful consideration, Roger Babson decided to try the world of finance and looked for work as an investment banker. In 1898, Roger began his business career working for a Boston investment firm where he learned about securities, stocks, and bonds. Inquisitive by nature, Roger Babson soon knew enough about investments to get himself fired. Acting in the best interests of his clients, he had questioned the methods and prices of his employer and quickly found himself out of work. Babson subsequently set up his own business selling bonds at competitive prices in New York City and then in Worcester, Massachusetts.

He published his analysis of stocks and bonds in newsletters and sold subscriptions to interested banks and investors. In 1904, with an initial investment of $1,200, Roger and Grace Babson founded Babson's Statistical Organization, later evolved into Business Statistics Organization and then Babson's Reports, until eventually it thrived as Babson-United Investment Reports. Probably due to the Internet and free stock data, it closed its doors in 2001.

Babson, in his autobiography titled the last chapter “How $2,000 can become $831,543 without borrowing a penny”. As the reader will later in this article, there are powerful techniques that he developed that are useful for a technical trader to achieve and surpass such a goal.

Roger read several books and kept Brenner’s Prophecies of future ups and downs in prices as one of his prize possessions. He found that a particular quote from the book was important to remember.

“There is a time in the price of certain products and commodities, Which if taken by men at the advance, But if taken on the decline leads to bankruptcy and ruin.”

It was Brenner’s book and a book by Henry Hall, How money is made in securities investments, that Roger Babson brought with him to an important meeting with his old friend, Professor Swain. It was Professor Swain that originally introduced him to the idea of applying Newton’s third law of motion to investing.

It was Professor Swain that worked with Roger Babson to come up with a composite chart called the Babson chart.

As can be seen in the Babson Chart, a normal line is drawn through the chart, Times above this line were thought of as times of prosperity and times below it were times of recession or depression. Babson utilized the charts to forecasts not only the times of prosperity but the degree and length of the periods.

Babson wrote in his autobiography, "Our contribution to the analyzing and forecasting of business conditions was in connection of the areas above and below this Normal line. Other systems of forecasting considered only the high and low of the charts, while our studies considered the areas of the charts.

Based upon Newton’s Law of Action and Reaction, we assumed that after a depression area, equal in area to the preceding area of prosperity, had developed, another area of prosperity would be due. In making these studies we took cognizance primarily of the shape of the areas.”

The size and shape of next area of prosperity, which was above the normal line, was independent of the size and shape of the prior area that was below the normal line.

Many scholars have examined the theory and found it to be flawed. As you will see after you see his theory applied to modern charts, the scholars of his day not truly understand the concept.