The R.N. Elliott story
Here's the story of the famed R.N. Elliott, the business analyst who turned market analyst. This article article orginally appeared as a three-part series in the September to November 1994 issues of Futures magazine.
By Robert Prechter
A man's life, like a piece of tapestry, is made up of many strands, which interwoven make a pattern; to separate a single one and look at it alone not only destroys the whole, but gives the strand itself a false value. - Learned Hand
Ralph Nelson Elliott was that rarest of breeds, a true scholar in the practical world of finance. As you read the story of his life, you may be intrigued that a theory so unique, when compared to other methods of market analysis at that time and even those of today, could have been developed so late in life by a man not of Wall Street background. 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."
Wave one The formative years Ralph Nelson Elliott was born July 28, 1871, in Marysville, Kan. His family tree featured some distinguished Americans, including his maternal great-grandfather Jonathan Hamblett, who fought in the Battle of Bunker Hill, and his paternal grandfather Hugh Elliott, a veteran of the War of 1812.
By the end of 1880, young Ralph Elliott had moved with his parents and older sister to San Antonio, Texas. During his teen years, he learned to speak and write Spanish fluently and developed a love for Mexico, 150 miles to the south. In 1891, at the age of 20, Elliott left home permanently to work on the railroads in Mexico at the height of North America's great railroad boom. He stayed there throughout his early 20s, where he was employed variously as a lineman, train dispatcher, stenographer, telegraph operator and station agent.
Around 1896, Elliott entered the accounting field (his educational path is unknown). Because he had already learned the industry from the bottom up, he developed the specialty of railroad accounting. In 1903, he married Mary Elizabeth Fitzpatrick (1869-1941), a New Yorker. For 25 years, Elliott held executive positions primarily with railroad companies in Mexico and Central America.
When later recounting a number of personal anecdotes in an analysis of the Latin American region, Elliott revealed his experiences to be more adventurous than one might assume, given his profession. For example, he recalls an incident indicating he was an accomplished horseman. He also described local styles of living that reflected great affluence and luxury, as well as abject poverty and squalor. Though the Elliott's often socialized with the well-to-do, he also saw instances in which "squirrels, lizards, parrots, foxes and even snakes were cooked and eaten with evident gusto." These observations could not have been made by a man who spent all his time in comfortable hotels or corporate offices. Not surprisingly, photos taken in his 40s show a man with a sturdy frame, a hardy appearance and an air of self-assurance, all of which well served Elliott's active life.
As Elliott practiced his profession, his corporate positions became increasingly important. His expertise was much broader than simply accounting. Indeed, he stated flatly in one article, "I do not like accounting, but I do like the work I am doing," which was business organization. He financially reorganized numerous corporations by installing new systems of record keeping, anticipating future expenditures and applying a principle of percentage allocation of revenues, which in another magazine article he called "the only sane method of controlling any business successfully." Much like an independent business consultant, Elliott ultimately served many clients, although his approach was to sign on with companies one at a time, remaining with each until restructuring was complete. Over the years Elliott earned a reputation as an expert business organizer.
The Elliotts might well have remained in Mexico for the rest of their lives, but circumstances ultimately forced their return to the United States. Beginning in 1911, Mexico experienced a series of violent revolutions that extended over the next several years. Eventually, civil strife in the country reached a crisis point, and in June 1916, in Elliott's words, "when the President [Wilson] ordered all Americans out" of Mexico, he complied and returned with his wife to Los Angeles.
Wave two Retrenchment and consolidation Having been dislodged from his longtime area of work and residence, Elliott appears to have undergone a period of dissatisfaction with his situation. Over the next four years, he changed jobs twice, investigated two others, and several times planned to return to Latin America.
Elliott's abilities were widely known and highly regarded. One position he considered accepting in Cuba was offered to him in an urgent cable that read in part, "Your services badly needed." He later was offered a position with the Cuba Railroad Co. despite the fact it had been accepted by someone else. As the company's vice president and general manager wrote to Elliott, "If we thought you would come, we would notify this party the offer to him was withdrawn." Such energetic solicitations for Elliott's services weren't unusual. Apparently, he was the most talented bilingual accountant and corporate reorganizer available to these Latin American companies.
Unafraid of the political climate, Elliott was back in Mexico in 1918, working as an auditor for the U.S.-owned Pierce Oil Corp., while his wife resided in Asheville, N.C., far from potential danger. Finally, in early 1920 the Elliotts moved to New York City. He may have moved there because of a corporate transfer or to please his New York-born wife. Whatever the reason, the move marked an abrupt change in Elliott's life. Soon afterward, he quit trying to find employment and residence in Latin America. Apparently, in New York, Elliott had found another place that suited his adventurous nature.
Wave three Productivity and progress Elliott, now in his early 50s, maintained a remarkably busy schedule over the next seven years. Later letters to Charles J. Collins reveal that he traveled to Canada, Germany, England and France, though for what reason (personal or business) is unknown. His largest company reorganization outside the railroad field was Amsinck & Co., an export-import house of 500 employees. During this period, Elliott also developed a second specialty as a business consultant to restaurants, cafeterias and tea rooms. To promote his new specialty, Elliott joined the editorial staff of the New York-based monthly business magazine, Tea Room and Gift Shop, in the summer of 1924.
Though the term "tea room" is now quaint, in the 1920s tea rooms were a booming business, and their popularity spread rapidly to the point that entrepreneurs from experienced restaurateurs to housewives were trying their hands at them. Tea Room and Gift Shop boasted 3,000 professional readers around the world. Elliott's arrival to the magazine was marked with some fanfare, with nearly a full page devoted to introducing him to its readers. His monthly column discussed what a Department of Commerce bulletin from the time called "scientific management," and argued that accounting was "just coming into its own" and becoming far more than just bookkeeping. "What I am trying to do," he summarized, "is help you make money," a goal that would later make stock market forecasting an attractive vocation.
The esteem with which Elliott's column was held in the restaurant accounting and management field is reflected by a 1924 invitation from Columbia University to speak on the subject. Elliott had to decline the invitation, as he was again out of New York on business.
Elliott's aggressive mobility and corporate service over the years occasionally brought him into contact with influential people in the academic and political world. One of these contacts was Dr. Jeremiah Whipple Jenks, a distinguished lawyer, academician, political advisor and author of nearly two dozen books on politics, social issues, religion and business. He also had served on the board of directors of several railroads, including the Pacific Railways of Nicaragua. Elliott undoubtedly met Jenks through professional association due to their common interests in the railroad industry, finance and Central America. Their friendship ultimately proved fortuitous, providing Elliott a fascinating opportunity.
In 1912, the long-standing liberal government of Nicaragua was overthrown by a coup. The U.S. Marines entered the country to effect a turnover of administrative control to the U.S. government for the stated purpose of protecting American interests in Nicaragua. After 12 years, the U.S. State Department tired of its role and appointed the High Commission of Nicaragua, of which Jenks was a member, to advise it on how to help stabilize the Nicaraguan government enough to allow the U.S. Marines to withdraw. Jenks was commissioned to establish a new banking system in the country.
At Jenks' recommendation, Elliott was chosen by the State Department for the post of chief accountant for Nicaragua. On Dec. 18, 1924, Elliott met with Secretary of State Charles Evans Hughes in Washington, D.C., to receive his formal appointment and instructions. He arrived in Managua in February 1925. Elliott then applied his experience in corporate reorganization to arranging the finances of an entire country.
Though originally scheduled to stay as long as two years, Elliott served in his official government position only until June of that year, when the U.S. extricated itself from Nicaragua. At that time, the U.S. recalled all State Department appointees as well as the Marines under the assumption that calm and order had been sufficiently restored. Following a brief return to New York, Elliott moved to Guatemala City in August to assume another major corporate position: general auditor of the International Railway of Central America, a U.S. company whose stock was traded on the New York and London Stock Exchanges. It was the last professional position R.N. Elliott held in his longtime field.
While serving with the Central American railway system in his last corporate executive position, R.N. Elliott wrote a comprehensive book, expanded from his magazine articles, entitled Tea Room and Cafeteria Management, published in August 1926 by Little, Brown & Co. The first favorable reviews appeared in The New York Herald Tribune and The New York Times Book Review, which commented "Mr. Elliott writes with authority upon all these matters because of his wide and varied business experience and observation." Ads referred to Elliott as "an expert organizer," an ability which was later manifest in his exposition of the Wave Principle. In the book, Elliott referred to business cycles as "the ebb and flow of circumstance," a phrase that uses the liquid metaphor he later called "waves."
This book announced Elliott's return to his career as a restaurant management specialist. He left a position (that in today's dollars paid $170,000 per year after taxes) and returned to New York with a definite goal in mind: to promote the book and cement his stature as the preeminent consultant in the field. From his temporary base at the Wolcott Hotel, Elliott issued numerous communications to his publisher regarding the book's promotion.
As important as Elliott's professional activities were to him, they were no longer his only passion. The State Department appointment in Nicaragua had focused his talent for problem solving in a new realm: politics. Elliott brought another project to the attention of a publisher, as revealed in a letter residing in State Department files concerning a second book he had written: The Future of Latin America. This 100-page manuscript, which Elliott forwarded to the State Department, constituted about half the planned book. It was eventually filed in the U.S. National Archives and discovered 67 years later during research for this biography.
The purpose of Elliott's treatise was to analyze the economic and social problems of Latin America and offer proposals for creating economic stability and lasting prosperity in the region. Elliott recognized that the chief obstacles to economic progress in Latin America were a staggering burden of debt and a cavalier attitude toward repayment.
Elliott outlined a comprehensive plan to be implemented "whenever a Latin American country approaches the United States with a request for financial or political aid." The plan involved U.S. assistance in the issuance of national debt payment bonds, the issuance of U.S. guaranteed bonds to pay outstanding debt, tax reform infrastructure development, civil service reform and public information campaigns in both Latin America and the United States.
In many ways his proposed program resembled later efforts such as the "Good Neighbor" policy of the Franklin D. Roosevelt administration and the more recent pro-development policies of the World Bank. Certainly, Elliott earned the respect of the Coolidge administration, as an internal State Department letter dated Feb. 2, 1929, listed him as a potential appointee for another government post in Nicaragua.
Whatever political influence Elliott's ideas for Latin America may have had, it is of secondary importance to Elliott's later achievement in discovering the Wave Principle. In that regard, The Future of Latin America is primarily meaningful in revealing a mind that was comfortable assimilating mountains of detail while holding the big picture in perspective, a prerequisite ability for discovering and codifying the Wave Principle. One passage in The Future of Latin America in particular shows Elliott's disposition to see patterns in the nature of things:
"The preceding chapters may have led the reader to the conclusion that the problems of the United States and of Latin America lend themselves to mutual solution. By a seeming coincidence, but what may well be a provision of nature working in accordance with laws not yet properly understood, all those things which the United States lacks are to be found in profusion in Latin America, and the needs of Latin America are such as the United States is best fitted to provide for."
Here Elliott implies that nature tends toward balance, in which scarcity of one sort is countered by abundance of another sort. This idea hints at the rhythmic, or dynamic balance he later found in the stock market.
With one book sold and a new one in progress, Elliott had two promising reasons to return to the United States. But there was a third reason: Elliott suffered from a severe alimentary tract illness caused by the organism amoeba histolytica. Though Elliott's lifestyle had been adventurous for decades without serious repercussion, time and chance caught up with him. The United States offered promise of an expert medical review.
By 1927, Elliott had returned to Los Angeles to adopt a more settled lifestyle after 36 years of intense work, travel and hotel living. Having left behind all his old business contacts, he concentrated on relocating his consulting business while attempting to recover from his illness. Curiously, for a man who later connected the Fibonacci sequence of numbers to human life, this change of careers and lifestyles occurred when Elliott was 55 years old, 21 years before his death.
Wave Four Elliott's reputation, built upon a distinguished career, his new book and a long list of references, was once again soaring. Book reviews remained favorable. The National Restaurant Association invited him to speak in Buffalo, N.Y. "The cost of my service," said one of his advertisements, "comes out of additional profits." With that guarantee, he was rapidly securing a sufficient number of clients in his new location.
Just when Elliott's future appeared its brightest, disaster struck. Instead of recovering from his illness, Elliott relapsed. By 1929 his affliction had developed into a debilitating case of pernicious anemia, leaving him bedridden. The adventurous and productive Elliott was forced into an unwanted retirement. Several times over the next five years he came close to death. His photograph in Financial World magazine a decade later shows that the relentless affliction took its toll, leaving Elliott much thinner than in earlier years.
Elliott needed something to occupy his mind while recuperating between the worst attacks of his illness. He then was living through the most exciting period in U.S. stock market history: the peak years of the roaring bull market of the 1920s, and immediately thereafter the most dramatic bear market crash on record. These events sparking his interest, he read Robert Rhea's 1932 book, Dow Theory, and became one of the first subscribers to Rhea's stock market service, "Dow Theory Comment." It was around this time that Elliott turned his full attention to studying the behavior of the stock market.
The discovery Like the Dow Theory genius Robert Rhea, who suffered from tuberculosis and was bedridden at the time, Elliott, who spent long hours on his front porch recuperating and studying, began to make some observations concerning the movement of stock prices. His decision to look for patterns in aggregate stock price movement was undoubtedly prompted by exposure to the tenets of Dow Theory. However, Elliott's ultimate discovery was his own. Investigating the possibility of form in the marketplace, he examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. He constructed the hourly charts from a data series that began for the Dow Jones Industrial Average Oct. 5, 1932, and the half-hourly charts from figures he collected off the tape in the trading room of a brokerage house. Elliott was fulfilling a mission 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. When Elliott applied his principles over the next several months to expectations for the stock market, he felt, as he later put it, "something like the inventor who is trying to become proficient as an operator of a machine of his own design." As he got more proficient in the application of his principles and corrected initial errors in their formulation, their accuracy amazed him.
At this point, Elliott's finances were at a precarious low due to the expenses of his illness, his inability to pursue his accounting business, a dependent wife and several investments that had suffered in the 1929-1932 market crash. His depleted financial condition, his developing fascination with the stock market and his discoveries combined to prompt Elliott's decision to undertake a new profession. He decided to "begin all over again," as he put it, "especially in work that I like, which is half the battle." So, at the age of 64, Elliott launched his new career and started what he later referred to as "Wave number five of my own life."
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. For quite some time, Elliott had subscribed to a market service founded and edited by Charles J. Collins and published by Investment Counsel Inc. of Detroit. Elliott felt he had learned enough about Collins through his stock market publication to trust him with his discovery. This assumption, to Elliott's advantage, proved correct.
On Feb. 19, 1935, following an exchange of letters, Elliott mailed Collins 17 pages of a treatise entitled "The Wave Principle." The first page contained Elliott's statement of the utility of the Wave Principle: "A careful study of certain recurring phenomena within the price structure itself has developed certain facts which, while they are not always vocal, do nevertheless furnish a principle that determines the trend and gives clear warning of reversal."
On the art of application, he commented, "waves do not make errors, but my version may be defective. The nearer one approaches the primary law, the less errors will occur." Referring to the repetition of the five wave pattern in the stock market, Elliott concluded, "Possibly the reason why I have not yet, and possibly never will know why this series occurs is because it is a law of nature. The laws of nature, and incidentally economics, are ruthless, which is as it should be."
Collins had put off the numerous correspondents who continually offered him systems for beating the market by asking them to forecast the market for a while, 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 predicted, broke below its 1934 low of 33.19. Advisors were turning negative and memories of the 1929-32 crash were 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 this famous telegram to Collins: "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 13-month corrective wave 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," proposed that Investment Counsel subscribe to Elliott's forecasts and said, "we are of the opinion that the Wave Principle is by far the best forecasting approach that has come to our attention."
Elliott responded with a proposal that Collins subscribe to his market timing service for a period of two years. If Investment Counsel was still satisfied with Elliott's success after that period, then Collins, whom Elliott considered a master writer, would prepare a book on the Wave Principle suitable for public distribution. For the next two years Collins monitored Elliott's calls on the market. His accuracy remained true, and at the end of the second year, in March 1937, Collins began working on the book, which was based on Elliott's original treatise. The Wave Principle was published August 31, 1938.
The first chapter of The Wave Principle states the following:
"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 book, Elliott packed up his belongings and moved with his wife to Columbia Heights, Brooklyn, a short subway stop from Manhattan's financial district. On Nov. 10, he published the first in a long series of Interpretive Letters, which outlined and forecasted the path of the market in terms of the Wave Principle. He issued the one- to four-page letters irregularly ("as the occasion requires"), ranging from three to seven issues annually between Nov. 10, 1938, and Aug. 6, 1945. Elliott initially priced his Interpretive Letters at $60 per year and continued to sell his monograph, which he called "the Treatise," for $15. Ralph Elliott was finally back in the saddle, and as independently in business as he had planned 11 years before.
A regular feature writer for Financial World magazine, Collins contacted the editors and introduced them to Elliott and his work in early 1939. Elliott was commissioned to write 12 articles on the Wave Principle, which were published between April and July. These articles established Elliott's reputation with the investment community.
After the publication of the Financial World articles, Elliott began writing in-depth follow-up essays that quickly evolved into a formal Educational Service, which he published from 1940 to 1944. One of Elliott's earliest "Educational Bulletins" was a groundbreaking work that lifted the Wave Principle from a comprehensive catalog of the market's behavioral patterns to a broad theory of collective human behavior not before seen in the field of economics and sociology.
Since 1935, Collins had sent Elliott books discussing natural occurrences of the Fibonacci sequence, a mathematical basis for patterned growth known and admired for centuries. Collins was apparently the person who first observed that totaling the number of waves in Elliott's description of the stock market's structure at successively lower degrees of trend reproduced the Fibonacci sequence. Elliott's own observation from his 1938 book that the Wave Principle applied to data series outside the stock market was another impetus to his investigation into the broader meaning of his discovery.
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. The culmination of this train of thought was a treatise of importance equal to that of his original book. On Oct. 1, 1940, Elliott published his first discussion of Leonardo Fibonacci's "Summation Series of Dynamic Symmetry" in an Educational Bulletin entitled "The Basis of the Wave Principle" under the subhead "How the Wave Principle Works, and its Correlation with Mathematical Laws." In it, 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.
This groundbreaking presentation led to what may have been an incident of intellectual piracy. On May 19, 1941, less than eight months after Elliott's treatise was disseminated to his small list of subscribers, Barron's published an article authored by "Edson Beers," a pseudonym of Edson Gould, whose middle name was Beers. The article, "A New Idea for Speculators: Applying the Principles of 'Dynamic Symmetry' to the Stock Market," purported to introduce this unquestionably novel idea, yet neglected to mention Elliott.
Gould confirmed the editor of Barron's told him he had received a call from Elliott, who was (justifiably) angry about the article, but declined further comment on the subject. History was kind, however, and in ensuing decades afforded Elliott full credit for his achievement.
On Dec. 30, 1941, Elliott's wife Mary Elizabeth, who had remained with him throughout his travels, career changes and medical misfortune, died at age 72. They had been married 38 years.
Elliott wrote the last of his Interpretive Letters in August 1945 and spent the rest of the year and the first five months of 1946 putting together what he considered his definitive work, Nature's Law - The Secret of the Universe, a grandiose title to be sure, but one that nevertheless has some justification. This 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 1,000 copies sold out quickly to various members of the New York financial community.
Elliott managed to issue at least two additional periodical pages, in July and December of 1946, but his chronic anemia was catching up with him, severely affecting his health once again. By 1947, Elliott's Wall Street friends persuaded him to admit himself to Methodist Hospital in Brooklyn for a health review. Then he moved to Kings Park State Hospital, one of New York's leading psychiatric hospitals, a type of facility that in those days also served as a home for the elderly. There Elliott's basic needs were satisfied as he lived out the final months of his life. Elliott and Collins continued their occasional meetings and remained friends and correspondents. According to accounts, Elliott remained mentally sharp right up to his final day.
Elliott died Jan. 15, 1948. The cause of death was listed as chronic myocarditis, a persistent inflammation of the heart muscle. As with the amoebic infection that led to a forced retirement from his earlier career, Elliott almost certainly contracted this illness during his time in Central America. In that region, chronic myocarditis often is caused by a parasitic infection called Chagas' disease, which can cause death many years after initial exposure.
One former trader claimed that Elliott's friends took up a collection (a common practice when the deceased left no immediate relatives) for his cremation, which took place two days later at the Fresh Pond Crematory in Middle Village, N.Y.
At the time of Elliott's death, a comparatively small number of investors employed his methods. 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.
Yet Elliott's legacy has only begun to manifest itself, as his discovery pertains not only to market movements, but to the dynamics of social mood change in general. Someday it will be recognized that Elliott's contribution to sociology is a breakthrough equivalent to the one that occurred in the 1600s and 1700s in the physical sciences. Given time and attention, the Wave Principle may ultimately save sociology from the realm of speculation and place it firmly in the sphere of science.
This three-part series of articles is condensed from "A Biography of Ralph Nelson Elliott," published in R.N. Elliott's Masterworks - The Definitive Collection. Robert Prechter is president of Elliott Wave International in Gainesville, Ga.