We are in one of those depressing moments of the manic-depressive cycles of the stock market. Invest-ability just told us that the FTSE 250 has now lost over 7 per cent this month and I can quite believe it with my portfolio certainly heading downhill. With the gloom of winter fast arriving, I can only recommend the book “Where are the customer’s yachts?” by Fred Schwed.
This book was first published in 1940 and the author had experienced Wall Street at its most extremes. He was a trader but lost a lot of his money in the crash of 1929. It’s a cynical look at the practices and people on Wall Street of which the author clearly had a fine understanding. One might conclude that the financial world has not changed much since.
It’s both witty and educational. As the introduction to the 2006 edition by Jason Sweig spells out: “The names and faces and machinery of Wall Street have changed completely from Schwed’s day, but the game remains the same. The Individual Investor is still situated at the very bottom of the food chain, a speck of plankton in a sea of predators”.
The title of the book refers to the apocryphal story of some out-of-town visitors to New York. On arriving at the Battery their guides indicated some handsome ships riding at anchor and said “Look those are the bankers’ and broker’s yachts”. “Where are the customer’s yachts?” asked the naïve visitor.
Here’s one educational paragraph from the book after he comments that “pitifully few financial experts have ever known for two years (much less fifteen) what was going to happen to any class of securities – and that the majority are usually spectacularly wrong in a much shorter time than that”:
“Still he is not a liar; nor is our other friend. I can explain it, because I have not only had lunch with economists, I have sometimes had dinner with psychiatrists. It seems that the immature mind has a regrettable tendency to believe, as actually true, that which it only hopes to be true. In this case the notion that the financial future is not predictable is just too unpleasant to be given any room at all in the Wall Streeter’s consciousness. But we expect a child to grow up in time and learn what is reality, as opposed to what are only his hopes. This however is asking too much of the romantic Wall Streeter – and they are all romantics, whether they be villains or philanthropists. Else they would never have chosen this business which is the business of dreams”.
On the subject of trusts he says “There has been a good deal of thoughtful, searching legislation enacted against trust abuses in recent years, and all of it favors the investor. The sad thing is that there can be no legislation against stupidity”. The recent events at Woodford come to mind.
The writer also comments on the detachment of the investor or speculator from the real businesses represented by pieces of paper – and “with these pieces of paper thrilling games can be played……this inability to grasp ultimate realities is the outstanding mental deficiency of the speculator, small as well as great”.
He points out that one of the agendas of the S.E.C. is to work towards the ideal of a completely informed investing public. A laudable effort he says but then points out that then “everybody would know whether to buy or sell, and whichever it was, everybody would try to do the same thing at once”. Orderly markets exist on differences of opinion. This view is worth pondering now that we have such instant dissemination of financial news and analysis on large cap stocks.
There is a much wisdom in this book which is both relatively short and readable. Highly recommended for those new to investment for the education and to experienced investors for the levity.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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