Wednesday, February 11, 2015

Where Are the Customers’ Yachts?

Fred Schwed, Jr.’s classic book Where Are the Customers’ Yachts? had me laughing from beginning to end. Written in 1940, you’d think that his “Good Hard Look at Wall Street” would paint a very different picture from what we see today, but most of his insights are still very relevant. Rather than demonizing the people on Wall Street, Schwed paints a hilarious picture of fallible people who are at least as effective at fooling themselves as fooling others.

In characterizing his book, the author writes, “‘Wall Street,’ reads the sinister old gag, ‘is a street with a river at one end and a graveyard at the other.’ This is striking, but incomplete. It omits the kindergarten in the middle, and that’s what this book is about.”

On the subject of financial footnotes in the search for a sound investment, Schwed writes “if we could be sure we had all the figures, plus all the pertinent footnotes which to a greater or lesser extent invalidate most of the figures, then we would certainly have something, even if it were only the blind staggers.”

The public presses a financial expert for predictions and he frequently delivers, no matter how often he’s been wrong in the past. “Still he is not a liar; nor is he our friend. ... 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.”

“On the economic side, there is no denying that the more financial predictions you make the more business you do and the more commissions you get.” But Schwed doesn’t think Wall Streeters set out to deceive. “The usual thought process is far more innocent. The broker influences the customer with his knowledge of the future, but only after he has convinced himself.”

One area where the financial world has changed considerably is lending. A banker’s “business might be defined as the lending of money exclusively to people who have no pressing need of it.” Today’s banker is more likely to hunt you down and force money into your pockets until just before the point where, if everything goes perfectly smoothly in your life, you can just barely handle the interest charges.

Wall Streeters tend to advise buying under the right conditions. “But when ‘conditions’ are good, stocks are high. Then without anyone having the courtesy to ring a warning bell, ‘conditions’ get bad. Stocks go down, and the margin clerk sends the forward-thinking investor ... the only piece of financial advice he will ever get from Wall Street which has no ifs or buts in it.” Buy high and sell low has been around for a long time.

“It is a fair thing to say of a piston, an elevator, or a golf ball at a certain moment, that it is ‘going up.’ ... But it is not a fair thing to say of the stock market, which, not being a physical thing, is not subject to Newton’s laws of propulsion.” I tried to make the same case that the stock market lacks momentum in the same sense as a physical object and that we can’t count on prices to continue as they have been in the recent past. However, Schwed is much funnier than I am.

Over several pages, Schwed likens chart reading (technical analysis) to predicting coin tosses, examining roulette wheel histories, and astrology, all with good humour.

Schwed says that leverage isn’t a good idea, “but I only know of one way of proving it to you conclusively. Go try it.”

On the subject of regret: “If the stocks that were sold out immediately start booming upwards again you can meet that difficulty by ceasing to read the financial page.”

Golf pros can easily prove their superiority at golf to the rest of us, “but thus far in our history there has been little evidence that there exists a demonstrable skill in managing security portfolios.”

In a story about “raiders,” Schwed illustrates a problem with stop-loss orders: An “operation of the raider” is “to depress a certain stock a few points in the hope of ‘touching off’ some stop-loss orders. If this is accomplished, the stock would sell yet lower, at least briefly, which gives the raider a chance for profit.”

Stock “manipulators” may aggressively buy a stock to drive up its price and try to spark interest in the stock. “At this point the gullible public is supposed to come galloping in to buy the stock from the manipulators at still higher prices. But not infrequently the gullible public acts like an overfed trout and just pays no attention.” So manipulation is frequently unsuccessful.

The author sees difficulty in explaining the distinction between investment and speculation. “This is something like explaining to the troubled adolescent that Love and Passion are two different things. He perceives that they are different, but they don’t seem quite different enough to clear up his problems.”

An investor may watch a stock’s price changes very closely, particularly while the price drops, “but the stock is not made self-conscious by his staring—it continues down. Watching is apparently more effective on kettles than on securities.”

Schwed believes that the effort to make sure the public is completely informed about the businesses behind each stock can be taken too far. If everybody “knew whether to buy or sell ... everybody would try to do the same thing at once. ... Orderly markets ... exist on differences of opinion.”

In summing up, “this book has chiefly tried to paint a picture of thousands of erring humans, of varying degrees of good will, solemnly engaged in the business of predicting the unpredictable.”

I highly recommend this book as a funny read that manages to teach some interesting lessons along the way. Despite all the changes that have taken place over the past 75 years, it’s amazing how much is still the same.


  1. Markets do have a psychological momentum which is different from physical momentum but does carry weight. Instead of being a steady force it's more of a self-reinforcing cycle with sudden changes. If you want to liken it to the harder sciences you could say that it's like antimatter since whatever idea most investors believe tends to come into contact with its opposite and destroys itself.

    I would think that some investors would find markets to be a lot like an airplane though - if they are the type of passengers who are terrified by unpredictable turbulence.

    1. @Richard: The main difference between the market's momentum and physical momentum is that markets can make sudden changes in direction.