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Where Are the Customers' Yachts by Fred Schwed

This book was recommended many times by Warren Buffett and Michael Bloomberg recommended it with a blurb on the back of the jacket of the book. The book doesn't disappoint. It's short, very easy to read and extremely entertaining. It gives a humorous take on the stock market in what I would guess is the early to middle of the 20th century. There is a lot to learn in this book about the stock market such as: don't short, hold for the long term, options are gambling, the difference between speculating and investing, the sales type culture of wall street, and how our emotions affect our investing.


Since very few people are emotionally stirred by low stock prices, the interest of the public in Wall St. at that time was about the same as its interest, in then and now, court tennis. Only a few traditionally wealthy families take an interest in low stock prices or in court tennis.

The author realizes why he isn’t rich. Because he buys stocks but he then sells them. He would be rich if he never sold them, and just held on.

One can’t say 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. A case in point is that preferred stock you bought as an extra safe investment several years ago when the salesman showed you that the stock was earning its dividend more than fifty times over. And then one day you found that this preferred stock was not earning its dividend five times, or even one time. It seems that both the figures and the salesman had neglected to point out the unholy size of the funded debt which was senior to your stock.

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. But we expect a child to grow up in time and lean what is reality, as opposed to what are only his hopes.

If these conclusions can be generalized, the underlying principle may be loosely stated thus: buy them when they are up, and sell them when the margin clerk insists on it. It is obviously impossible for the thinking Wall Streeter to avoid acting on that principle. He certainly can’t buy [securities] when they are down, because when they are down “conditions” are terrible. You can’t ask an experienced Wall Street man to buy stocks when car loadings have just hit a new low and unemployment is at a peak and steel capacity is less than half of normal and a very big man (“of course I can’t tell you his name”) has just informed him in confidence that one of the big underwriting houses in the Middle West is in really serious trouble.

Margin: 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. The idea is that he only has to pay 6% or so on the mortgage and if he can’t wangle something better than a measly six percent out of a round lot of money, he ought not to be in business. This is another argument I am unable and unwilling to discuss further. The idea is easily extended to margin trading. We assume that it is a wise and profitable venture to buy 100 shares of United Fido at ten, paying $1000 for it. Ergo, wouldn’t it be even better to buy 200 shares paying the same $1,000? And even better to make it three or four hundred if we can find a sufficiently kindly broker to do us this favor? The answer is no. But I only know one way of proving it to you conclusively. Go try it.

There was [a] customer who was wise, and fabulously rich. His richness, early in 1929, consisted of seven and a half million dollars, mostly gained in the past three years. His wisdom lay in this: he put a million and a half dollars into Liberty bonds and gave them to his wife with a forceful presentation speech. “My dearest,” he said, “these securities are now yours; they are not mine. They represent quite as much income as we shall ever really need for the rest of our lives. I shall continue to speculate and make more money. But if by any incredible chance I should ever come to you and ask for these bonds back again, under no circumstances give them to me, for you will then know that I have gone crazy.” Six months later he needed margin, further to protect the six million which, he was certain, was only temporarily gone. He went for the money to the wife of his bosom, who demurred. But he was a persuasive man: he got the bonds back. Temporarily. All of the foregoing customers were afflicted with that common psychiatric disturbance: rhinophobia, or the “the dread of ever having any cash.” Customers who suffer from rhinophobia always have as many securities as possible. When they sell out stocks at a profit they hasten to fill the void in their accounts with other stocks. The odd part is that they are frequently economical souls who do not believe in frittering away their money on food and drink and momentary pleasure. If they play bridge of an evening for a quarter of a cent and lose $17, they are liable to go home in a pretty depressed state of mind. Perhaps on the same day a slight weakness in the market reduced their equity $500, but that doesn’t trouble them much; they still have their beloved stocks. It is practically axiomatic for these men that every time the stock market goes bust, so do they.

Few men become thieves out of pure devilment; rather they sidle into thievery under their own personal duress.

Those classes of investments deemed “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 the time.

Bankers strongly prefer only to float a new issue of foreign bonds when foreign bonds in general are popular*; and the same goes for everything else from gold stocks to sewer improvement notes. There are two simple reasons for this: the first is that those are the only times they have a good chance to sell the securities, and the second is that those are the only times they believe in the projects themselves. *That is how that $50,000,000 Ruritania 7 percent External Loan Gold Notes issue was floated. No doubt you remember what happened in that case. The then Prime Minister of Ruritania took the $44,000,000 that was left after the expenses of underwriting and, in a moment of emotional excitement, gave them to a blonde.

[The trust officer] had his staff check and see what would have happened if stocks for the trust accounts had been chosen by ink spots instead of by experts. The result showed that this method would have resulted in much less loss than that which had actually taken place. The bank had chosen the popular securities, but the flying ink drops had at least been impartial.

When he buys a stock, borrowing money casually form the broker to do it, and the stock goes down 5 points he is comparatively calm. But when he sells it short and it goes up ¾, he is immediately desperate. He thinks it might go to 1000, although precious few stocks ever have. When he buys he never considers that it might go to zero, though that is the precise figure where a great many stocks eventually wind up.

The option [referred to in this sense as a call or put] is the true “long shot” of stock gambling.

Options are infinitely attractive to dream about. We all know many stocks which have moved much more than ten points in a month, and more than fifty points in 3 months. But when a man stops dreaming these transactions and tries doing them, something different always seems to happen.

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, “Another little orgy wouldn’t do us any harm,” is the feeling that persists both downtown and up. 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 eight 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!

Admittedly, it is preposterous to suggest that stock speculation is like coin flipping. I know that there is more skill to stock speculation. What I have never been able to determine is – how much more? [My note: The author imagines a game where 400,000 people gather together to play a coin flipping game. After one round, there will be 200,000 people, after 2 rounds; there will be 100,000 people and so on. Eventually books will be written on the remaining contestants after 9 or 10 rounds. They will highlight their “skill” in coin flipping, but it is obvious that there is no skill and that their survival in this coin flipping game is due to probability and luck. I’m guessing that this is where Buffett got his idea for his article, “The SuperInvestors of Graham and Doddesville” ( ]

Investment and speculation are said to be 2 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’re different, but they don’t seem quite different enough to clear up his problems.

If you take $1000 down to Wall St. and attempt to run it up to $25,000 in the course of a year, you’re speculating. If you take $25,000 down there and attempt to earn $1000 a year with it (by buying 25 4% bonds) you’re investing.

A Little Wonderful Advice – For no fee at all I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple: 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. [My note: This was my favorite note when I read this sometime ago and I was positive I would be able to adhere to this piece of advice. I was wrong. This is called market timing and it's impossible. I remember when professional investors interviewed in Barons in 2012-2013 thought interest rates were going up and in 2015-2016 when they thought the stock market peaked. It's the middle of 2019 and neither of those were true.]

In the days before the SEC, the description of a new issue commonly consisted of a couple of pages containing an inadequate balance sheet, a skimpy indication of recent earnings, and perhaps a little pep talk. This leaflet didn’t begin to contain the things than an investor should know. But it did have one tremendous advantage: an investor could be persuaded to read it. Nowadays a properly registered prospectus contains everything; it is as long as this book, and duller. Just looking at it causes the intellect to shrink up into a ball of protest.

My suspicion is that the commissioners sometimes strive to please their public with regulations that they can’t have much faith in themselves. It is humanly asking too much of them to say to the public, “Now just stop fretting yourselves about some of these things you don’t quite understand.” Indeed, one of the chief points on the agenda of the SEC has been to work toward the ideal of a “completely informed investing public.” This effort is in every way laudable, and progress, though necessarily slow, should be assured. However, just as a fanciful exercise in paradox, let us consider what would happen if on some miraculous dawn the entire investing public woke up to find itself “completely informed.” That would certainly be the end of an orderly market, for a panic, either bull or bear, would ensue. Everybody would know whether to buy or sell, and whichever it was, everybody would try to do the same thing at once. And there would be no one to complete the other side of the trade! Orderly markets, like horse races, exist on differences of opinions.

This book has not been successful it it has not suggested some big-league problems, such as: (1) Should our financial machinery be scrapped? (2) Should it be further tinkered with, and if so, how much further? (3) Is capitalism doomed? (4) What active stock selling under five dollars looks hot just now for a quick turn to pay for the Buick the wife just bought? [The author goes on to conclude (1) no it should be scrapped; (2) The author chooses to not commit himself to this question, but notes that our financial machinery is the patient with the government as the doctor and it would be a mistake to kill the “patient”. (3) I don’t see an answer. (4) The author humorously and ironically advises his reader to send him $2 and he will mail you the name of his stock pick in an envelope.

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