The following quote from the book gave a good idea how the title came about.
“Once in the dead dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at the anchor.
He said, “Look, those are the bankers’ and brokers’ yachts.”
“Where are the customers’ yachts?” asked the naive visitor.”
– Ancient story.
Some of us would have been given over-promises from financial companies before and this will be a good book where someone stepped out to criticise the financial industry on behalf of you. What shocked me was that the bad things he described in 1920s still exist today! This game of “over-promise and under-deliver” played by the financial industry has been at least 100 years old. The author was unapologetic with his words and at times, sarcastic, which makes it a funny read. However, I found his ‘complain’ tiring at certain parts of the book where he went on and on about the same thing. Nonetheless, there were interesting quotes from the book which I like to share.
How gurus are born?
“The referee gives a signal for the first game and 400,000 coins flash in the sun as they are tossed. The scorers make their tabulations, and discover that 200,000 people are winners and 200,000 are losers. Then the second game is played. Of the original 200,000 winners, about half of them win again. We now have about 100,000 who have won two games and an equal number who have been so unfortunate as to lose both games. The rest have so far broken even. The simplest thing from now on is to keep our eyes on the winners. (No one is ever much interested in the losers, anyway.)
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The third game is played, and of the 100,000 who have won both games half of them are again successful. These 50,000, in the fourth game, are reduced to 25,000, and in the fifth to 12,500. These 12,500 have now won five straight without a loss and are no doubt beginning to fancy themselves as coin flippers. They feel they have an “instinct” for it. However, in the sixth game, 6250 of them are disappointed and amazed to find that they have finally lost, and perhaps some of them start a Congressional investigation. But the victorious 6250 play on and are successively reduced in number until less than a thousand are left. This little band has won some nine straight without a loss, and by this time most of them have at least a local reputation for their ability. People come from some distance to consult them about their method of calling heads and tails, and they modestly give explanations of how they have achieved their success. Eventually there are about a dozen men who have won every single time for about fifteen games. These are regarded as the experts, the greatest coin flippers in history, the men who never lose, and they have their biographies written.”
The Value of Predictions
“… 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.”
“… customers have an unfortunate habit of asking about the financial future. Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers – “I don’t know”.”
“When they do express opinions, the statisticians and economists manage to come to the same general conclusions as do the partners and the customers’s men. If these conclusions can be generalized, the underlying principle may be loosely stated thus: buy them when they are up, and sell them when the margin clerk insists on it.”
Fund Management and Advisory do not solve your money problem
“But thus far in our history there has been little evidence that there exists a demonstrable skill in managing security portfolios.”
“Unfortunately, there are also several thousand burglars extant, all of whom refer to themselves these days as investment counsel. This is not the fault of the bona fide investment counsel; it is no doubt a subtle complement to them. Some of these other gentry allocate the funds between themselves and their clients in the ancient classic manner, i.e., at the close of the day’s business they take all the money and throw it up in the air. Everything that sticks to the ceiling belongs to the clients.”
“Bankers strongly prefer only to float a new issue of foreign bonds when foreign bonds in general are popular; and same goes for everything else from gold stocks to sewer-improvement notes. There are two simple reasons for this; the first is that those are the only times they have a good chance to sell the securities, and the second is that those are the only times they believe in the projects themselves.”
Are you speculating or investing?
Definition of speculation and investment:
“Speculation is an effort, probably unsuccessful, to turn a little money into a lot.
Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”
“Those classes of investments considered “best” change from period to period. The pathetic fallacy is that what are thought to be the best are in truth only the most popular – the most active, the most talked of, the most boosted, and consequently, the highest in price at that time.”
A strategy that is simple to understand but difficult to do
“When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this – just wait for the depression which will come sooner or later. When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks, No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.”
“… it distresses me to report that I have never enjoyed the social acquaintance of anyone who managed to do it. It looks easy as rolling off a log, but it isn’t. The chief difficulties, of course, are psychological. It requires buying bonds when bonds are generally unpopular, and buying stocks when stocks are universally detested.”