This book is a decade old. This is an updated version of the book. The book is ‘about image and reality and identity and anxiety and money’. The stock market isn’t necessarily fully rational. The 60s were a crazy people with many greedy people. Professional money managers are over-rated. The first rule to make money is not to lose it. More information doesn’t make you smarter. Many brokerage firms were out of business in the 1970s because of reduced commission rates. The fee structure changed completely.
The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer. – George Goodman
You (Identity, Anxiety, Money)
Why did the master say ‘Game’? Adam Smith thought of himself as a moral philosopher. He wrote ‘The Wealth of Nations’. I used a pseudonym for Wall Street. It was my Sunday recreation name. I called myself Adam Smith. It was a great name as not many people known the real one anyway. Keynes was very perceptive of markets. In the past, the holders of money were thought to be prudent. Keynes’ mentioned that investing is like a game. Game Theory has a huge impact on our lives. The stock market is too complex for game theoreticians. However, it has been hard to put into equations and quantify at the moment. The stock market is a great national pastime. Preferred stocks and bonds are not part of the game as they are more boring in nature. Investing has a lot to do with human psychology. You have to guess how the crowd behaves. More and more information is available in the market. The professional managers are getting more skilled by the day. You can be rich but even then you still realize you want to invest and to continue to be thrilled by it. There are people who are really addicted to it and love the stock market. Of course, the aim is to make more money. This book is not suitable if you want to rely on a professional money manager.
To what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power, and preeminence? – Adam Smith
It is very hard to get excited over a bond basis book, where your index finger traces along a column until it gets to the proper degree of safety and yield. – George Goodman
Mister Johnson’s Reading List. There are a lot of books telling you how to get rich. One good book is Security Analysis by Benjamin Graham. Security value is subjective. Fears, greed, hopes all play a part. Value is one thing. Liquidity is important too. It is important to consider that. Fidelity did very well in the past. It is a fund. They have a brilliant reputation. The market is an art, not a science. He has read many books too. He delegated responsibilities and work to the money managers. Some people do not pick stocks, but they sense market sentiments. Markets rely on emotions. You should not try to over-analyze them. It is important to know yourself. Does a market have a personality of its own? It is important to develop your own personality when investing. Why is the emotional aspect not well explored? Is it even worth exploring in the first place?
There is no such thing as a final answer to security values. A dozen experts will arrive at 12 different conclusions. It often happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. – Gerald Loeb
If you don’t know who you are, the stock market is an expensive place to find out. – George Goodman
The stock market is like a beautiful woman – endlessly fascinating, endlessly complex, always changing, always mystifying. I have been absorbed and immersed since 1924 and I know this is no science. It is an art. – Mister Johnson
There are fundamentals in the marketplace, but the unexplored area is the emotional area. All the charts and breadth indicators and technical palaver are the statistician’s attempts to describe an emotional state. – George Goodman
Can Ink Blots Tell you whether you are the type who will make a lot of money in the market? There are simple tests to determine whether you are a good investor. What will you do with your free time? Analysts and aggressive portfolio managers will answer the questions differently. The accountants will get the answer right. Analysts like to use inductive reasoning. The portfolio manager just likes to win, no matter what. One must learn to operate without anxiety and stay cool. The important question is to ask how you behave when everyone is roaring the other way. Is the market really a crowd?
If you really know what’s going on, you don’t even have to know what’s going on to know what’s going on. – George Goodman
Is the Market Really a Crowd? The crowd is wrong because it behaves normally. Are all the uninformed people part of the crowd too? People in a crowd usually act differently from how they would act alone. Some people get hypnotized when they are in crowds. They often respond or react to suggestions. Crowds do not reason. Often, they only think that they reason. Crowds tend to play up emotions and intensify them. Often, it feels comfortable to be in a crowd. It is very difficult not to give in to temptation and follow the crowd.
Eighty percent of the market is psychology. Investors whose actions are dominated by their emotions are most likely to get into trouble. – Unknown
You Mean That’s What money Really Is? Money has a mystical quality. Money in itself is useless. We have to change our perception of money and see where that leads us. When you chase after money, does it just show that you are greedy? Is it a dehumanization of human nature? Why collect something so useless? Money is condensed wealth. The stock market is thrilling because you need to save up and work hard before you participate. Seasoned investors never really spend the money that they make. However, they are still compelled to continue. What is it that makes them continue to play?
It is true that you have to work long enough to acquire a surplus enough to buy some chips for the Game, but the money you make playing the Game isn’t work, it’s play – or are you making it seem like work? – George Goodman
What are they in it for? If most investors don’t make money from the Game, why are they still playing it? Some people are in because it sounds cool. There are people who are seriously irrational and won’t sell the stock simply because it might have appreciated a little in the past. To some, when the stock goes up, they get nervous. People always look back with regret on the stocks they didn’t buy and appreciated in future. Even though your portfolio might be up, you might still kick yourself because you missed out on others. There is always another stock going up more than the one you bought. Some people are weird enough to tell the broker that they only wanted to make a specific sum of money and not more. There are people who hate brokers for making so much commissions. They feel brokers like to lie. They feel brokers are touting for more business. Some just want the broker to talk to and to provide information on the stock for them. They just want to be part of what is going on.
But he didn’t feel very good about it. If the stock went up, he should have bought more, so he was stupid there, and if it went down, that proved he was stupid there. – George Goodman
Identity and Anxiety. Why are we not growing rich? Markets mean different things to different people. Greed and fear are the most common emotions. Greed occurs when others have made money on stocks which you hadn’t bought. Obviously, no one wants to buy at the top. Prices get pushed up even though the fundamentals do not support them. Some people expect their money to double in a few years. The trick is to have a firm identity which is not influenced by people speculating. One has to avoid anxiety situations. One important thing to realize is that the stock doesn’t know you own it. The stock is a piece of paper who doesn’t love you. Do not be emotionally attached to any stock. The key is to start out with no preconceived notions. Every day is a new day. The end object of investment should be serenity. Will you feel serene after earning a million? Or will you want more? Will you compare yourself with more successful people? People in society are usually measured by how much they can earn. A lot of people define themselves by how much money they make. The stock market is a zero sum game, there will be winners and losers. The trouble is that people who get burnt do not learn and want to continue playing.
If you know that the stock doesn’t know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday. – George Goodman
What’s the difference whether you have twenty thousand dollars or sixty thousand? You can buy a few more things, but it’s not enough to buy freedom, not enough to change your life. You’re either a wage slave or you’re not. You have to go for the quantum jumps. Why are we on Wall Street? To make money. – Harry
Where the Money Is. As outside investors, it is not possible to make outrageous amounts of money. The ones making a lot of money are the inside stockholders of a company. These are the people who started a company and then IPO. Most people can’t do this unless you have a capital at the start already. The possibilities of different businesses which can go IPO are endless.
Mr. Smith Admits His Biases. How do you correct your biases? One idea is that you buy good stocks and put them away and in the long run you can’t go wrong. The problem is that nothing works all the time. Sometimes, inaction is the better option. Inaction is also considered action. Some people try to anticipate business cycles to make money. However, this will not make you very rich. Some companies’ earnings are cyclical. Some people anticipate swing in interest rates. You can also buy the turnarounds, rotten companies which have sold off unprofitable segments and have new management. The examples involved require some knowledge. However, be wary of companies where earnings shot up way too quickly. However, the problem is that past performance is no indication for future performance. Companies with earnings growth consistently must have something unique about it. They must have a competitive advantage. This thing must not be easily replicated or copied. Can you just buy good stocks in the past like IBM, Xerox, Polaroid and lock them away? The rate of growth of earnings matter too. Note that it is important to examine the P/E ratios too. A great product can be ruined by bad management. The larger you grow, the harder it is to keep the % of growth constant or increasing because of a large base. Another tip is to concentrate on a few holdings and do not diversify too much. How to find great stocks? The company should be adaptable to change and stay innovative. You can get ideas from smart people. That is one of the rules. You can use the scuttlebutt technique, which is to talk to a lot of people associated with the business. Find your own stocks and your own coloured stocks.
If playing the Stock Market game has been fun, it may be difficult to stop playing, even when that button of yours is burning your finger. Repeated shocks will give you anxiety, and anxiety is the enemy of identity, and without identity there is no serenity. – George Goodman
Part 2: Systems
Can Footprints Predict the Future? Almost every firm has a research department. It is important to know what everyone else is doing. Everyone has limited time available. Charting is looking for trends and repetitions. Charts can very well prove to the traps as well. A chart can reflect volume and price range. The four stages are 1) Accumulation; 2) Mark-up; 3) Distribution; 4) Panic Liquidation. Can charts indicate the future? The assumption is that what happens yesterday will happen again tomorrow. Can the footprints of price movements really predict the future? Is the market fully efficient?
When the stock doesn’t get anywhere after a rise, but churns around at the same price level, the chartists call it an area of resistance. When a stock drops to a point where it doesn’t drop any more, and churns around, they call this an area of support. – George Goodman
What the Hell Is a Random Walk? Charting seeks to find order in something that happens. Random walk means there is no order. Random walk theory was proposed by academics. He is Eugene Fama. It basically says ‘prices have no memory, and yesterday has nothing to do with tomorrow.’ There is no way to predict the future performance. You might as well select stocks by throwing darts. It assumes that the market is completely efficient. It also assumes that stocks have an intrinsic value. The actions of investors should cause actual price to wander randomly around its intrinsic value. However, in reality, the actual price might not be equal intrinsic value. The analysts all try to make the market more efficient. The Chartists certainly don’t believe in the random walk. The analysts also feel that their analysis is useful. The fact is that the market is reasonably efficient. The chartists can certainly be a force in the market. Can intuition be programmed? Chartists are happy that now everything can be programmed.
Computers and Computers. Railroad Bill is a computer. Computers revolutionized investments. Computers can screen too. The good thing was that it could perform many calculations simultaneously. Analysts pore through all these data and try to pick out trends. The computer can pick out stocks which are behaving out of pattern. Computers now do the buying and selling themselves. With the prevalence of computers, do individual investors still stand a chance? This result is kind of disturbing for the individual investor.
But What do the Numbers Mean? Earnings must be assessed using proper accounting standards. There are certain items which must or must not be included. It allows for comparisons between different companies too. Useful lives might be applied differently between different companies. Some companies use declining balances. There are different accounting policies that can be adopted and all these are permitted. Earnings management is often practiced. Accounting firms can get sued if they present inaccurate figures. Free-form companies are those which acquire others. Companies’ management is really important. Some management like to juice up the accounting or practice creative accounting. Wall Street loves constantly growing and stable earnings.
Why are the little people always wrong? Find out what the average investor is doing. Once you know, just do the opposite. They are not little people. It just refers to the ordinary investor who doesn’t have a lot of money. Will do the opposite theory work? Some people trade on inside information. There are those who like to participate in the market because they feel it makes them intelligent.
Part 3: The Pros
The Cult of Performance. These are the powerful people with enough information and money to move prices. Now, there is a lot of regulation. Is it even possible? There are many institutions, like mutual funds, pension funds and insurance companies. Stocks crashed in 1929. There was massive panic selling. There was a point where fund managers wanted huge growth and started buying growth stocks. Concentration and turnover seem to matter a lot. The higher the turnover, the higher the volume and the happier the brokers are. However, in the market, many are only concerned with short term performance and speculative behavior. Institutional investors tend to hoard shares and when it is time to exit, it might be difficult to find buyers. Sometimes, trading might be suspended as well. Remember that liquidity is the cornerstone of every market. Performance managers want a quick buck.
Lunch at Scarsdale Fats’. These are institutional investors. They get treated well. These bankers are treated to fat dinners. It is a networking event. Scarsdale wants to know more information from others. These are essentially lunch with commissions and many funds get invited.
Losers and Winners: Poor Grenville, Charley, and the Kids. Chartists tend to trade short term and very aggressively. Many investors want immediate results. Wall Street love firms who can meet earnings projections. When the market crashes through resistance levels, sometimes you will yourself, where is the bottom? Markets can be very irrational. Computer leasing stocks were damn hot in the past and could generate super-normal returns.
We live in an age of charts and computers, and the thing about charts and computer studies is that they show what is moving, and if everybody plays this game, then what moves is what is already moving. – George Goodman
But the market does not follow logic, it follows some mysterious tides of mass psychology. Thus earnings projections get marked up and down as the prices go up and down, just because Wall Streeters hate the insecurity of anarchy. – George Goodman
Timing, and a Diversion: The Cocoa Game. Timing is crucial, not just the financials of the company. You have get the stock ahead of others. Those who play the Game will know it is very difficult even when the markets are not favourable. At that time, the Cocoa Exchange was leveraged and unregulated. People could be involved in that when the stock market was bad. The price depends on demand and supply. This was the birth of forwards.
If you are in the right stocks at the wrong time, you may be right but have a long wait; at least you are better off than coming late to the party. You don’t want to be on the dance floor when the music stops. – George Goodman
Part 4: Visions of the Apocalypse – Can It All Come Tumbling Down?
My Friend The Gnome of Zurich Says a Major Money Crisis is on its Way. They are miners who work near gold and can be informants. He can predict when gold prices will rise. Some currencies are pegged to gold prices. However, governments and central banks might choose to unpeg as well. He is basically a cynic who believes governments can’t manage debt well and enter deficits and eventually crash.
If All The Half Dollars Have Disappeared, is Something Sinister Gaining on Us? Will there ever be an international currency? The issue is that governments are expected to care for their people in order to win votes, resulting in them over-spending. People have to believe in what their governments are doing and how they are spending. If not, the market will simply crash. Luckily, the apocalypse has never arrived.
Part 5: Visions of the Millennium
Do You Really Want to Be Rich? Should you ought to be rich? Do you want to be evaluated by your wealth? Has capitalism gone too far? What did Keynes think of the Money Game? Why do men continue to want to make money? That is because they have a purpose. They think long term and want to grow and forward their interests. He believed that future generations will strive more for virtue and sane wisdom than pure money. If you know the Game is not your thing, then jolly well stay away from it completely.