Monday, June 4, 2012

If You're So Smart, Why Aren't You Rich? (1)

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

Can the individual investor, with limited time and resources, hope to succeed in a market full of professional investors and money managers?  Surprisingly, many financial writers answer this question affirmatively.  Bradbury K. Thurlow wrote the following in the introduction to his 1981 classic, Rediscovering the Wheel: Contrary Thinking & Investment Strategy:

 As long as the present institutional situation persists -- and it appears it can only intensify with the continuing mushrooming (cancerous) growth in pension funds -- the smaller professional investor will have a distinct competitive advantage over the larger professional.  Whether the amateur investor can match the smaller professional is a question I had much in mind in writing this book and never satisfactorily answered.  If the investor spends enough time on the subject, he becomes, paid or not, a professional and, to the extent he is handling his own money, he has the strongest of all motives to succeed.  He is exempt from the professional's frequent requirement to provide irrelevant entertainment to clients by explaining transactions that may be based on intuition.  On the whole, the amateur, if he is properly disciplined and does his homework, should do about as well as the small professional and much better than the large professional investor.*

We need to remember, as Humphrey B. Neill pointed out in Tape Reading & Market Tactics, that, regardless of age, gender, race, family background, level of education, degree of intellect or station in life, every participant in the market shares one universally common trait: everyone is human.  Notwithstanding their financial education and market training, the  professionals on Wall Street remain just as susceptible to human emotions and the contagion of the investment crowd as the first time investor.

In The Money Game, Adam Smith quoted John Maynard Keynes concerning the goals of Wall Street professionals as follows:

Our good Lord Keynes had it all spotted out in 1935, in one of the most acute passages ever written:

"It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself.  It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise.  For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public.  They are concerned not with what an investment is really worth to a man who buys it "for keeps," but with what the market will value it at, under the influence of mass psychology, three months or a year hence.**

Mr. Smith concluded this excerpt from Keynes with the statement, "That is the way it is, and no one has ever said it better."**

It would appear that professionals focus and trade as speculators, not long term investors.  If that is the case, then one might ask what the true goal of the professional investor really is.  We will delve into this in greater depth in the next blog.

*  Excerpt from Rediscovering the Wheel: Contrary Thinking & Investment Strategy, Bradbury K. Thurlow, copyright ©1981, published by Fraser Publishing Company, is used by permission of the current copyright holder.

** Excerpts from The Money Game by Adam Smith, copyright © 1967, 1968 by Adam Smith are used by permission of Random House, Inc.

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