Book Review - Where are the Customers' Yachts?
Highly entertaining and outright funny. An Investment Classic written decades ago that's still highly relevant today.
Many that know me, know I like to read, including non-fiction about investing, business, history, politics, psychology, economics, etc. I really enjoy when several of these topics are covered off in a single book and especially when the book then goes on to stand the tests of time to become an “Investment Classic”. Typing those words reminds me of opening a wrapped gift a number of years ago to find a copy of one such book to which I proclaimed, “Oh wow, a Classic! Thank-you!”. My sister, who is also an avid reader, perked up, looked at the book, laughed, and smirked sarcastically “A Classic?!?”, as if to suggest a book about money, stocks, or investing should never be considered “A Classic”. In the grand scheme of things, she is probably right, but within the genre of investment books, there are some great ones that are just as relevant today as they were many decades ago. And there is a ridiculously small portion of the population that likes to call them “Classics”.
An Investment Classic
“Where Are the Customers’ Yachts” by Fred Schwed Jr. is one of those books. I love this book. It was written in 1940 and has been republished three times since then. It is highly entertaining and outright funny. But the value is not in the jokes. Like many “Investment Classics”, the value is in the author’s ability to reveal the folly of human nature, giving real life examples of how it never changes.
The silliness we have seen in financial markets in the last few years is not that much different from what Schwed witnessed in the 1920’s. Those who had read his book would not have been surprised when that same silliness appeared in the 1960’s, the 1980’s, and again in the 1990’s. The best investors understand psychology. They have a firm grasp of stock market history. Once you have read some of these old investment classics, you are not surprised by the current day Teslas and the Bitcoins. Perhaps the names are different, but it has all happened many times before.
The book is cynical, sarcastic, and funny.
I find Schwed to be quite knowledgeable about the securities industry. But he is also honest and self deprecating, openly admitting there is much he does not understand (promising not to waste the reader’s time on any of it).
Schwed tells colourful stories about the different characters making up the investment world. He feels a lot of them are good and innocent people. They just do not understand what they are doing. Yet they convince themselves and others they are competent. He points out it is not just the brokers dealing in foolishness and nonsense, but also the customers, legislators, the press, and the public.
Schwed outlines individual investors’ many shortcomings, including how many of us despise holding any cash, and how many people are desperate to magnify their returns with margin debt. He talks about bubbles:
“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… This is quite human, because in the last boom we acted so silly. If we are old enough we probably acted silly in the last three. We either got in too late, or out too late, or both. But now that we are experienced, just give us one more shot at a good reliable runaway boom!”
It seems that 81 years ago, he even had something to say about the Robinhood / GameStop / Hertz / Reddit / meme stock crowd:
“There has evolved a considerable saga of the deeds and derring-do of the Great Speculators… those who made, and often lost, their fortunes in stocks, trading them, manipulating them, cornering them, and generally performing razzle-dazzle with them… (The speculator) knows that in some savage unvisited spot like Jersey City a corporation is actually in business, but he doesn’t really think that important. What fascinates him is that against this vague concept of a living business certain pieces of engraved paper can be issued, and that with these pieces of paper thrilling games can be played. He does not easily conceive the business in terms of workers, management, products, processes, markets, and patents… This inability to grasp ultimate realities is the outstanding mental deficiency of the speculator, small as well as great. He is an incurable romantic and usually egotistical. His mind is fast, active, and resourceful, and, in a peculiarly limited way, shrewd. That is, he is shrewd in everything save that he is constantly, day by day, laying himself open to the possibility of being ruined. He seems to believe, with Mother Goose, that a treetop is the proper place for a cradle. Nowhere is this lack of reality more tragic than in the speculator’s failure to comprehend what money really is. He doesn’t know what it is, though his stenographer does. He thinks it is an item on the righthand side of a broker’s statement. He doesn’t know what it is for, though you and I do, and could easily tell him. He thinks it is for “swinging a big line” of some active common stock.”
There is no doubt the financial markets are teeming with silliness, nonsense, and delusions, as Schwed suggests. In my opinion, to be a successful investor you need (among other things) to be aware of this silliness, understand it, and watch out for it. There is value in being cynical. But only to a degree. Moons ago, when I was a financial statement auditor, we called it “professional skepticism”. You should not let the skepticism or cynicism get carried away. You should not throw up your hands and declare “markets are rigged”, and in doing so ignore saving, forgo investing, avoid business, and just play golf. Schwed himself admits this is where he went wrong, stating in the introduction to the 1955 edition that he was originally overly patronizing in discussing mutual funds. He notes that since his book was first published, they steadily increased in value. He criticizes himself for trying to time the purchase and sale of fund shares:
“A long time later it turns out that I should have just bought them, and thereafter I should have just sat on them like a fat, stupid peasant. A peasant, however, who is rich beyond his limited dreams of avarice.”
While Schwed has some stinging words for financial advice (and I agree there is some bad and expensive advice out there), I do not believe he proves people should not seek financial advice. Some people need help with saving. Some need help understanding how much to save, and how much savings they will need to retire. They need help navigating the different types of accounts and related tax rules. They want a relationship with someone they can trust – someone who can cut through the jargon and help them understand what matters. Some clients do not feel comfortable picking funds or stocks, or even approving transactions suggested by a broker. These people should seek help in the form of a trusted advisor. Of course, they should try to find the right type of advisor – ideally one that thinks long term, helps keep costs low, limits turnover, pays attention to taxes, does not get swept up in the flavour of the day, and has experience and the right temperament to cope with the volatility and silliness that unfortunately will always be part of stock market investing.
Summing up, I give this book five stars, with the caveat that you probably need to like investing books to enjoy it as much as I did. I have a list of other “Investing Classics”… but maybe I’ll save those for future blogs?
Until next time!
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