Thursday, January 28, 2010

Schwed, Where Are the Customers’ Yachts?

It was the end of the work day, time to kick back and read something. My alternatives were a paper on a strategy for portfolio risk management and Fred Schwed’s 1940 book Where Are the Customers’ Yachts? (republished by Fraser Publishing Company in 1985). Want to guess the winner?

Fred Schwed, Jr., first of all, doesn’t seem to be a pseudonym because the book’s copyright was renewed by Harriet Wolf Schwed. Perhaps if you’re saddled with a name like Fred Schwed you’ve got to be funny. There’s no question this is one funny book! He skewers everyone—and, yes, the same “everyones” who are still around. Well, that’s not quite accurate. He has a soft spot for the 1940 equivalent of the high frequency trader as well as the specialist. And he rallies to the defense of the “black-hearted” short seller.

Schwed’s primary targets are the market soothsayers. In his attack he is agnostic as to method; statisticians, tape readers, chartists, fundamental analysts, and all those up the chain in retail brokerage are treated with roughly equal contempt. The yacht-less customers, especially those who use leverage, don’t escape unscathed either.

Without further ado, let me quote three passages to give you a sense of the book’s timeliness and humor.

Heading the Wall Street hierarchy is “the conservative banker [who] says ‘yes’ only a few times a year. His rule is that he reserves his yesses for organizations so wealthy that if he said ‘no,’ some other banker would quickly say ‘yes.’ . . . In times of stress, when everybody needs money, he strives to avoid lending to anybody, but usually makes an exception of the United States government. Likewise, in prosperous times he is a mighty liberal lender—so liberal that years later unfriendly committees ask him what he thought he was thinking about, and he is unable to remember clearly.” (pp. 30-31)

“Most of the great speculators either ended their days in penury or came sickeningly close to it one or more times. An interesting exception was Hetty Green, who never took a backward step. She started rich and soon got richer, and after that she got richer and richer. But Mrs. Green was something of a realist, being both a woman and a miser. Few great speculators are either.” (p. 163)

“Investment and speculation are said to be two different things, and the prudent man is advised to engage in the one and avoid the other. 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.” (p. 171)

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