My hands-down favorite
book on investing in general and Wall Street in particular is a classic that was written decades ago by someone who was relatively
unknown in the business. In Where Are the Customers’ Yachts?,
Fred Schwed, Jr. paints a portrait of Wall Street during the Great Depression that really hasn’t changed much in the
ensuing decades and is perhaps even more poignant than ever in understanding today’s weakened financial markets and
economy. Furthermore, in my opinion, this book should be read by almost anyone involved in the business.
The book basically states what so many
people today are finally realizing. In essence it says that the way to build wealth over time is to be
an owner of an investment company, or a broker, or anyone else involved in the buying, selling, or managing of securities
rather than a customer. The natural implication of this is that many practitioners of the investment business
don’t really create anything, but rather slowly siphon other people’s money to themselves via high—or hidden—fees
or by selling other products with esoteric terminology that their clients could not even come close to understanding.
In fact, sometimes when you speak with an “investment
professional” they often use so many esoteric or academic words that even as someone with my experience and business
degrees, I haven’t a clue what they are talking about. But, if you think about it, that is just the
point. How many of these folks make a sale is by confusing rather than explaining. In
effect, their clients don’t want to appear unknowledgeable about the business, so rather than speak up and ask for an
explanation in plain English, they often just buy the product. Even more troubling, though, is that I would
bet that many of these “investment professionals” don’t even understand the terminology that they are promulgating,
though they make it sound as if they have the secret to cure cancer via investment nomenclature (if only it were so easy).
Schwed also delves into the concept of
“conflicts of interests” on Wall Street, which were clearly pervasive then and are even more pervasive now. Schwed
uses the example of a broker having the temptation to sell securities that his firm underwrote—and likely has in inventory—rather
than other securities that may be a better fit for the client. The implication is that the broker in the
said example is tempted to respond to his own incentive of increasing the profits of the firm, rather than solely focusing
on increasing the profits of his client. And today, given all the proprietary trading going on at investment
banks, these mixed incentives continue to be a problem. In actuality, the banks have to constantly manage
their own incentives against their clients’ incentives, and when push comes to shove—as it has over the last few
years—whose incentive do you think they are more likely to respond to?
But like any good author, Schwed also offers a solution for the proverbial customer of Wall Street to make money.
On page 180 and 181 of his book he offers this seminal advice:
“For no fee at all I am prepared to offer any wealthy person an investment program which will last a lifetime
and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple:
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 that 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.
A glance at financial history will show that there never was a generation for
whom this advice would have worked splendidly. But it distresses me to report that I have never enjoyed
the social acquaintance of anyone who managed do to it. It looks as 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.”
It occurs to me that this basic philosophy is almost exactly what Warren Buffett
and his partner Charlie Munger have done. They generally do—and also have the ability to do--the
opposite of what the crowd is doing, and they also have the ability and patience to wait. This ability
to wait might be the trait that truly differentiates them, as most other people are always in a hurry and worried about what
the other guy is doing. Not surprisingly, in my opinion, they are the modern practitioners of what Schwed
illuminated for the public so many years ago.
So the next time you hear someone on Wall Street extolling the virtues of the next greatest thing—that neither
of you probably really understand—I hope that you’ll think of Schwed (or even Buffett or Munger) and really try
to think about what is best for you, the customer, rather than for Wall Street.
As always, please do send me any questions or comments you may have.
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