On Investing: A Splash of Cold Reality
History - World Released - Feb 08, 2015
Thinking about investing? Below are three books that offer advice from the school of hard knocks, and a fourth that explains (artfully) the capitalistic system under which we all make a living.
WHERE ARE ALL THE CUSTOMERS’ YACHTS? by Fred Schwed
So, you want to make money on Wall Street? Good, only beware of investment counselors, stock brokers, or anyone purporting to have all the answers, including authors of books on investing. Fortunately, Fred Schwed is not among them. His is a cautionary tale. He's worked on the Street and knows of its many pitfalls. Yes, his book was originally published in 1955, but as Jason Zweig (Money Magazine) points out in the introduction to the 2006 edition, nothing has changed. "The names and faces and machinery of Wall Street have changed completely from Schwed's day, but the game remains the same."
The fact is, says the author, no one can predict the future with certainty, but that is what Wall Street analysts, investment counselors and ambitious stock brokers claim to do. It can't be done. Who makes the really big money on Wall Street? Investment bankers and brokers--from their fees. They are the fat cats with the yachts parked out on Long Island Sound, not the clients.
Schwed aims his harshest criticism (with tongue-in-cheek) at investment counselors. "(They) 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."
The author makes a fine distinction between speculators and investors. Speculators are the quick-buck artists hoping to make a killing; they rarely do. Investors are patient and looking for some place to put their money for the long term; they are the ones who actually make money. Put another way: "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."
Schwed's book is funny, wise, and a splash of cold reality. While filled with irony, it's not cynical. The author, who reportedly lost a bundle on Wall Street, remains a believer. "I have a sneaking fondness for that wretched old hag, the capitalistic system . . . we had better preserve our financial machinery even with much of the nonsense still adhering to it . . . The only successful method so far devised for getting millions out of the public, for enterprise both good and bad, is some system similar to the devious mechanism of Wall Street."
Bottom line: no one on Wall Street has all the answers. It's a guessing game. Be smart: invest conservatively for the long term, and maintain a healthy dose of skepticism. If it sounds too good to be true, it is.
HOW TO LIE WITH STATISTICS by Darrell Huff
Reading this book I couldn't help remembering the adage, "Believe none of what you hear, and only half of what you see." Sage advice, and I'm sure Benjamin Franklin who said it would get a huge kick out of reading "How to Lie With Statistics" by Darrell Huff. I also couldn't help thinking of Secretary of Defense Robert McNamara (under presidents Kennedy and Johnson) who cited statistics repeatedly to show that the United States was winning the war in Vietnam. If that isn't an indictment of how statistics can deceive--besides this wonderful little book--I don't know what is. The final chapter, "How to Talk Back to a Statistic" is a step-by-step guide to figure out how someone is trying to deceive you with data. Buy this little book, read it, ponder it, and read it again, to become wise to how marketers use statistics, charts and other means of presenting numbers to baffle and trick the public. Bottom line: be skeptical, and always, always read the fine print.
MANIAS, PANICS, AND CRASHES: A HISTORY OF FINANCIAL CRISES by Charles P. Kindleberger
Looking for a crash course on market economics? This is it—literally. Despite what your stockbroker may tell you, markets are irrational and unpredictable because they involve people and that old bugaboo, greed. Here’s the scenario: there’s an upswing in the business cycle fed by speculative excess. As firms or families see others making lots of money from speculative purchases and resales, they rush to jump on the bandwagon. “There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich,” the author wryly notes. When the number of firms and families engaged in speculation grows large, bringing in segments of the population that normally do not partake in such ventures, speculation leads away from normal, rational behavior to “mania,” which the dictionary defines as “a form of madness.” People of wealth or credit rush to switch out of money or borrow to buy real or illiquid financial assets. The market becomes overheated, distress sets in, then panic, followed by a reverse movement, a rush away from real or financial assets to money, or repayment of debt, with a resulting crash in the prices of commodities, houses, buildings, land, stocks, bonds—in whatever has been the subject of the mania.
First published in 1978, and now into its fourth printing, the late financial economist Charles Kindelberger looks back at banking crises, Ponzi schemes and other mass disturbances as they build and burst, dating from the 15th century to the present. Nothing is immune to speculation, not even tulips grown in the Netherlands, which led to a financial disruption in Europe in 1636-40. Other examples include precious metals, canals, import commodities (sugar, coffee, cotton and wheat), foreign bonds, foreign mines, foreign direct investment, U.S. mutual funds, building sites, agricultural land, public lands, railroad shares, joint-stock banks, joint-stock discount houses, private companies going public, existing and merged companies, and so on. Kindelberger recounts them all in a soothing and reassuring voice as if all might yet be well, which it isn’t, as page after page market bubbles explode like fireworks in the night. The author refrains from pontificating on how the world ought to be, but rather shows how it is, warts and all. He’s sympathetic to the vagaries of financial markets, while pointing out that most of the time the markets function as intended, concentrating wealth on large projects that benefit the public good and otherwise would be impossible.
Kindelberger makes a case for a lender of last resort to halt a run out of real and illiquid financial assets into money by making more money available. He does so by showing what happens when no one steps in to halt financial crashes (economic depression) and when they do (damage control followed by quick recovery). Kindelberger’s advice to investors: avoid the rush, and always look before you leap.
ON THE WEALTH OF NATIONS by P.J. O’Rourke
P.J. O’Rourke is a clever writer, and “On the Wealth of Nations” is a clever book. “Some acolytes of (Adam) Smith might be surprised if they ever read him,” he states on page 47, and then cites a number of examples that would seem to fly in the face of American capitalism. O’Rourke’s relatively short book (195 pages) is an amusing and profound commentary on Smith’s lengthy 900-page treatise. Some examples:
Liberty: “Any definition of liberty that is not based on a right to property and a right to the same rights as all other people have is meaningless. What we have is ours, and nobody can push us around. This is practically all we mean when we say we are free. Other rights derive from these, when we even bother with those other rights.”
Economists: “Knowing something about economics does not alter the fact that economics is unknowable. Economists can’t predict the future any better than Jennifer Aniston and Donald Rumsfeld could predict Brad Pitt and Iraq.”
Banking and money: “A central bank is the institution that controls the supply of a country’s money. This would be a straightforward matter if it weren’t for three facts: Money is imaginary. Banking doesn’t involve money. And a central bank isn’t a bank.” Huh? “(Money) is a conjectural idea we have that vaguely approximates value,” he explains. “If we accept Smith’s definition of value as ‘toil and trouble,’ banks deal in toil and trouble. Banking is a clever device for storing your toil and trouble.”
Socialism: “Nothing can be more absurd than to imagine that men in general should work less when they work for themselves, than when they work for other people” (quoting Smith).
Government: “Government is not supposed to be productive. (It’s) a service, and it should never be mistaken for a factory that furnishes us with all our jobs, homes and discount blood pressure pills. Whenever a politician is heard to say that government spending is ‘an investment’ he should be told to get a job.”
The Commercial Revolution of the Middle Ages: “Leftist critics of free markets assume that there is a fraudulent aspect to capitalism. They’re right. We tricked the feudal powers into setting us free, and we remain free by continuing to bamboozle them. We used chicanery and sharp dealing to found our cities, become rich bourgeoisie, and supply ourselves with creature comforts. We left the barbarian aristocracy in their drafty castles throwing chicken bones on the floor.”
O’Rourke even explains why “The Wealth of Nations” is so darn long. “The Enlightenment style, though clear, was diffuse. A digression, if worthy-seeming, was not considered a distraction. It was thought of the same way twenty-first-century mothers with careers think of multitasking. And the pace of reading was more leisurely in the 1700s. There wasn’t much on TV.”
Even if you don’t care a whit about economics or the ideas of an 18th Scottish philosopher, you’ll enjoy your time reading O’Rourke. “On the Wealth of Nations” is informative, thought-provoking, and a frolicsome good time.
Market watcher Jason Zweig perhaps says it best: “Successful investing isn’t about outsmarting the next guy, but rather about minimizing your own stupidity.”
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