Schwed’s Mockery

Where Are The Customers’ Yachts?

Fred Schwed, Jr

John Wiley & Sons, Inc 1955 edition

Fred Schwed Jr. was a professional trader who got out of the market after losing a bundle in the 1929 stock market crash.

Introduction by:

John Rothchild, Author, a Fool and his Money, Financial Columnist, Time Magazine 
It’s amazing how well Schwed’s book is hold up after fifty five years.  About the only things that’s changed on Wall Street is that computers have replaced pencils and graph paper.  Otherwise the basics are the same.  The investor’s need to believe somebody is matched by the financial advisor’s need to make a nice living.  If one of them has to be disappointed, it’s bound to be the former. 

Jason Zweig , Money Magazine, 2005 –

The individual investor is still situated at the very bottom of the food chain, a speck of plankton afloat in a sea of predators.

Schwed’s mockery, with the passage of time, has become indistinguishable from prophecy.

The people who took corporate financial reports on faith and never questioned the accounting principles of major companies like Enron or WorldCom would have known better if they had remember Schwed’s rule:  “Accounting is not even an art, but just a state of mind.”  His words are another reminder that if you are not a skeptic, you are not an investor.

Schwed’s is the only financial book, out of the hundreds I’ve read, that will provoke you, teach you and crack you up all at once.

Michael Lewis 1995 Author of Liar Poker –

What Schwed has done is capture fully – in deceptively simple language – the lunacy at the heart of the investment business: the widely held belief that there is someone out there who can tell you how to turn a little money into a lot, quickly

Excerpts from the book

Where are the customers’ yachts?

Once in the dear 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 anchor.  He said, ”Look, those are the bankers’ and brokers’ yachts.” 

“Where are the customers’ yachts?” asked the naïve visitor

Schwed’s classic twin definition

Speculation is an effort, probably unsuccessful, to turn a little money into a lot.  Investing is an effort, which should be successful, to prevent a lot of money from becoming a little.

 But the ultimate dream

They (Wall Streeters) almost never shed: that there is a secret, meaningful and predictable, in the rise and fall of financial enterprises – that a “close study” of this and that will prove something; that it will tell the initiate when there will be a rally or give the speculator a better than even chance of making a killing ……. All these things are demonstrably unpredictable. …… But this cup of tea is too bitter for a Wall Streeter.

But soon the brokers ….. began adding the business of prophecy to the business of brokerage.

…..customers have an unfortunate habit of asking about the financial future. …..you may be assured that you will get a detail answer.  Rarely will it be the most difficult of all answers – “I don’t know.”

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. ….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.  The worst that should be said of him is that he wants to convince himself badly and that he therefore succeeds in convincing himself – generally badly.

When the bull jumped over the moon

– refer to as “the era of wonderful nonsense”.  It was one of the great universal delusions of history, somewhat comparable to such magnificent errors as the world was flat or that all you had to do to heal anybody of anything was to bleed him.

…., if they bought on margin, they went to “the Cleaners,” ….

“What is the market doing?”

Usual reply to the inquiry, “What is the market doing?” The answers are “It is going up,” or “it is going down”.  ……This suggests not only that it has been going up, but that it will probably continue to on up, for a little time at least, because whatever impulse started it is still operating to some extent.  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 or inertia. Unfortunate most of us unconsciously credit this false analogy.  Thus we are not tempted to buy unless they are “going Up” or to sell unless they are “going down”.  But when the market is “going up” like fury, there is no reason to believe that the very next “tick” is more likely to be up than down. 

Chart reading

As a science, I should say that chart reading shares a pedestal with astrology; ….  That one can, by examining the line already drawn, make a useful guess at the line not yet drawn, must be predicated on the hypothesis that “history repeats itself.”  History does in a vague way repeat itself, but I does it slowly and ponderously, and with an infinite number of surprising variations.

All I was able to conclude from my informal studies was that chart reading is a complex way of arriving at a simple theorem, to wit:  when they gone up for a considerable time, they will continue to go up for a considerable time; and the same holds true for going down.

Margin trading

 In trying it, you must use real money.  Making “mind bets” won’t do.  Like all life’s rich emotional experiences, the full flavor of losing important money cannot be convey by literature. 

There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.

Stock for Retirement

“They told me to buy this stock for old age. It worked wonderfully.  Within a week I was an old man.”

Leverage