Where Are The Customers Yachts - T-Tees - Your Answers Await, Life's Questions Unraveled

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Fred Schwed delivers a cynical, sarcastic, insiders perspective on the business of Wall Street. His book stands as a timeless warning to investors and speculators alike.

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The Notes

The title of the book is in reference to a story that comes from the late 1800s. Friends of William Travers, a big short seller of the time, admired the beautiful yachts of the richest Wall Street brokers. Finally, one asks, “Where are the customers’ yachts?”
Wall Street is not in the business of making you money, it’s in the business of generating transactions.
“If you are not a skeptic, you are not an investor.” — Jason Zweig via the intro.
There are two types of books about Wall Street: admiring and vindictive. One comes out of bull markets, the other out of bear markets.
“One can’t say that figures lie. But figures, as used in financial arguments, seem to have the bad habit of expressing a small part of the truth forcibly, and neglecting the other part, as do some people we know.”
The countless financial clichés amount to an attempt to sound smart while saying nothing in numerous ways.
“It seems that the immature mind has a regrettable tendency to believe, as actually true, that which it only hopes to be true.”
One hope, that Wall Street never seems to outgrow, is the ability to predict the future. The ongoing search for a sign among the charts that foretells the rise and fall of markets never ceases.
Investors and speculators have a habit of wanting to know about the future. The demand is supplied by Wall Street — with full faith in their ability no less — which conveniently fuels transactions.
The realistic answer — “I don’t know” — is also the hardest response to get (and give) to any questions about the future.
“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.”
The hardest part of being bearish in a booming market — or just underinvested in a market — is seeing everyone but you make money as the market rises. Missing gains can turn bears bullish, with a risk of it happening late in the cycle.
Bankers lend conservatively during depressed times — lending to those who don’t need money — but lend liberally during prosperous times to anyone who wants money.
“Like most Wall Streeters, bankers suffer from the inability to do nothing. Your average Wall Streeter, faced with nothing profitable to do, does nothing for only a brief time. Then, suddenly and hysterically, he does something which turns out to be extremely unprofitable. He is not a lazy man.”
Everyone — from customers to Wall Streeters — is susceptible to buying high and selling low, because when stocks are falling conditions look bad and when stocks are rising conditions look good.
“When ‘conditions’ are good, the forward-looking investor buys. But when ‘conditions’ are good, stocks are high. Then, without anyone having the courtesy to ring a warning bell, ‘conditions’ get bad.”
“All of these theories are true part of the time; none of them all the time. They are, therefore, dangerous, though sometimes useful.” — Major L.L.B. Angas
“There have always been a considerable number of pathetic people who busy themselves examining the last thousand numbers which have appeared on a roulette wheel, in search of some repeating pattern. Sadly enough, they have usually found it.”
“History does in a vague way repeat itself, but it does it slowly and ponderously, and with an infinite number of surprising variations.”
Accounting is more art than science.
“Accounting is not even an art, but just a state of mind.”
Skill requirements to be in finance: understanding probabilities, judging risks realistically, and basic math. Here’s the test:
1. What’s the objection to playing a roulette wheel with two zeros?
2. If you flip a coin four times and get heads four times in a row, what’s the most likely result for the fifth toss?
3. Assuming you answer #3 correctly, do you always resist making a draw in poker?
4. Is there any benefit to a shareholder when a stock is split to 2 to 1?
5. What’s the main purpose of a business?
Businesses exist to make money. That’s the only correct answer, but “to make money” is the least attractive answer compared to what CEOs tell themselves like to build a great product or service or hire great people or transform the industry or take care of customers.
The benefit to being a lazy investor is that an ambitious investor often tries to double their money as quickly as possible but ends up losing it all.
“Americans find margin trading a particularly attractive little invention. It parallels the American principle that the first thing a man should do with his home, even before moving in, is to put it in hock.”
Some lessons, like losing money, can only be learned by experience: “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.”
“It is easy to take a small profit, but taking a small loss is frequently just a good intention. Eventually the customer finds himself throwing good money after bad, until there isn’t any good money left.”
The investors’ disease: fear of having cash. It’s the temptations to be fully invested in as many stocks as possible because a cash position is unbearable (what if stocks go up?). Schwed calls it rhinophobia.
“The man who chooses to take his money and churn it furiously…cannot in any way predict his fate, save for a single assurance. So long as any of the money still clings to the sides of the churn, he will not be bored.”
The sales argument for investment trusts (mutual funds) — an expert manager and diversification — doesn’t live up to the hype. Manager skill is inconsistent at best and a trust can still drop sharply in price.
Investment trust shares (fund shares) are created to be sold.
“The subject of choosing profitable financial investments does not lend itself to competence. There is almost no visible supply.”
Better to give your money to a smart crook than an honest bonehead. You have a better chance of getting money back from the crook (via legal means) than the bonehead.
“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. It’s very much a matter of fashion.”
Buying the “best” stocks means buying the most popular — thus the highest priced — which tends to work out badly.
IPOs and other new issues also dependent on popularity. It’s easier to sell an IPO when similar issues are in fashion.
Nobody cares about bears and short sellers until a ton of people lose money. When it happens, investors want someone to blame, not something to blame for their losses.
“I must touch on the ancient human tendency to personify general misfortune in some human form. While “hundreds of thousands are being plunged into poverty” only the thoughtful ask, “What is happening to us?” The popular cry is “Who is doing this to us?” and its satisfying sequel — “Just let me get my hands on him!””
Short selling is psychologically unnatural. The normal tendency is optimism — to see a stock rise in price. Few people think a stock might go to zero.
Banning short shorting won’t eliminate price crashes. Just have to look at real estate or illiquid issues.
“A man who borrows money to buy a common stock has no right to think of himself as a constructive social benefactor. He is just another fellow trying to be smart, or lucky, or both. Those who have hopes of living by the sword should not make too loud a fuss when they perish by the sword.”
The benefit of options to a broker is the dual ability to convince both buyers and sellers they can make money.
“Choosing the proper stock, at the proper time, for the proper move, is difficult. But the greater difficulty, I am grieved to report, arises after that has all been successfully done.”
“Booms go boom.”
“In our moments of sober thought we all realize that booms are bad things, not good. But nearly all of us have a secret hankering for another one.”
Who doesn’t want the chance to make up for their stupid mistakes in the last boom because now they have experience?
The typical speculator sees stocks as ticker symbols and pieces of paper to play games with, not businesses with factories, workers, and products. It’s the inability to see things for what they are that leads to extraordinary risktaking and ruin.
“What do you think of the mentality of a man who goes down to Wall Street with very little and wins, by speculation, thirty millions, none of which he has yet lost? My own considered opinion is that he too is pretty much a loony. In order to make his second unimportant million he had to risk his first precious million.” Like Buffett’s take on risking what have and need for what you don’t need.
There will always be a few speculators who make money year after year just like there are always a few coin flippers who luckily hit on a long streak of heads. The longer it goes on, the more they both — speculator and coin flipper — believe they have some hidden skill.
Old school stock manipulation (new school too) is based on a behavioral trigger — people like to buy stocks that are “going up.”
“Speculation is an effort, probably unsuccessfully, 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.”
There’s a fine enough line between speculation and investing that the differences aren’t always obvious. One obvious difference is speculation attempts to get rich quick, investing attempts to get rich slow. The chance of success improves with the lengthening time horizon.
Defining “safe” investments brings loads of exceptions. Bonds may be “safe,” but some stocks prove themselves to be safer than bonds.
The stock doesn’t care you own it and that won’t change no matter how hard you “watch” it.
“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 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.”
The above advice is difficult but a few people accomplish it because someone is buying stocks sold at detestable prices.
On Price and Value: Value is whatever you want to make it when you sprinkle in enough optimism or pessimism.
A potential risk when investing for an income is letting lifestyle creep dictate investment selection.
Two big investment mistakes are trying to earn too high of a return and playing it too safe.
Describing Wall Street: “…thousands of erring humans, of varying degrees of good will, solemnly engaged in the business of predicting the unpredictable.”
“The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools.”
Despite all of its problems, capitalism is the least worst system available. Best to accept the nonsense that comes with it, then try anything else.