WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
In order to rationally participate in the market, you need a strategy. In deciding on a strategy that works for you as an individual investor, you first must decide what making an investment means to you. Is it all about investing your money in a well run publicly traded corporation? Or is it more like placing a bet at a black jack table in Vegas? It is best if you know which type you are. We return to The Money Game by Adam Smith for some insight into Vegas style gamblers and Wall Street style investors. He wrote about the legendary English economist and investor, John Maynard Keynes, as follows:
We are taught - at least those of us who grew up without a great deal of it - that money is A Very Serious Business, that the stewardship of capital is holy, and that the handler of money must conduct himself as a Prudent Man. It is all part of the Protestant ethic and the spirit of Capitalism and I suppose it all helped to make this country what it is. Penny saved, penny earned, waste not, want not, Summer Sale, Save 10 Percent, and so on. Then I came across this sentence in "Long-Term Expectation" of Keynes' General Theory:
In order to rationally participate in the market, you need a strategy. In deciding on a strategy that works for you as an individual investor, you first must decide what making an investment means to you. Is it all about investing your money in a well run publicly traded corporation? Or is it more like placing a bet at a black jack table in Vegas? It is best if you know which type you are. We return to The Money Game by Adam Smith for some insight into Vegas style gamblers and Wall Street style investors. He wrote about the legendary English economist and investor, John Maynard Keynes, as follows:
We are taught - at least those of us who grew up without a great deal of it - that money is A Very Serious Business, that the stewardship of capital is holy, and that the handler of money must conduct himself as a Prudent Man. It is all part of the Protestant ethic and the spirit of Capitalism and I suppose it all helped to make this country what it is. Penny saved, penny earned, waste not, want not, Summer Sale, Save 10 Percent, and so on. Then I came across this sentence in "Long-Term Expectation" of Keynes' General Theory:
The game of professional investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.
Game? Game? Why did the Master say Game? He could have said business or profession or occupation or what have you. What is a Game? It is "sport, play, frolic, or fun"; "a scheme or art employed in the pursuit of an object of purpose"; "a contest, conducted according to set rules, for amusement or recreation or winning a stake." Does that sound like Owning a Share of American Industry? Participating in the Long-Term Growth of the American Economy? No, but it sounds like the stock market.
Buying stock in a company, regardless of the amount of study and careful investigation, remains, at its essence, a bet on the future performance of the company. A bet is a bet, no matter how you dress it up. The fact that there does not appear to be a particular person on the other side, in effect betting against you, does not change the fact that you are making a wager. With a nod to Ben Graham, you might want to think of Mr. Market as putting down the bet against you.
Justin Mamis also discusses the gambling aspects of stock investing. We have already spent time with his book, The Nature of Risk, Stock Market Survival and the Meaning of Life, exploring the effect on us of our childhood angels, or demons if you prefer. You may remember that he characterized Americans not as basically optimistic, but rather as perpetually hopeful. He compared an investor to a sports fan in a search for excitement as follows:
The cliches of daily life are those of routine, discouragement, tiredness; of the rat race; of a cold, the IRS. Guys root for dreadful teams for years - keep buying season tickets in the hope that eventually they'll own seats for the Super Bowl or World Series. And better than being a sports fan - because you can actually participate - and even better than gambling - because it is socially acceptable - playing the stock market becomes a way out of an otherwise mundane and stressful environment. It has glamour, plus the chance of improving one's lot without being an overt bet. There's an excitement to it, along with the illusion that a successful investment is almost within reach, if one only knew how to use it. The market seems to represent hope itself.
I must take issue with Mr. Mamis' comment that an investment is not an overt bet. It most certainly is. The fact that it is a bet does not make it illegal, immoral or fattening. It is what it is, and an investor should just accept it. If however, an investment is made, regardless of the rationalization behind it, just to participate in the market's excitement, then losses will almost surely follow.
Fishing, to those who don't, looks to be a rather dull activity consisting of either throwing a lure into the water repeatedly or just sitting and watching a floating bobber. Those who fish know the slight, hopeful tension experienced with each cast or with each dip of the bobber - maybe this time a fish will take your bait and run with it. Regardless of the degree of professionalism behind a stock purchase, I suspect that many investors share that same hopeful excitement with the fisherman - maybe this time the market will take your stock and run with it.
Making a stock purchase or waiting for that last card - they both have a common element, each is a bet on the future. Facing the unknown always generates a certain level of emotion. It's just part of Professor Keynes' Game.
In the next post, we will learn the vocabulary of Wall Street. For some, this will be old hat. For others, this will explain the terms we'll use when we explore strategies of investing.
Feel free to click the comment link below, add your thoughts and pick the "Anonymous" profile. You can also add your name. All comments are posted within 24 hours of receipt and replied to on Fridays.
Excerpts from The Money Game by Adam Smith, copyright 1967, 1968, are used with permission of Random House, Inc. Excerpts from The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991, are used with permission of Mr. Mamis and Fraser Publishing Company.
Buying stock in a company, regardless of the amount of study and careful investigation, remains, at its essence, a bet on the future performance of the company. A bet is a bet, no matter how you dress it up. The fact that there does not appear to be a particular person on the other side, in effect betting against you, does not change the fact that you are making a wager. With a nod to Ben Graham, you might want to think of Mr. Market as putting down the bet against you.
Justin Mamis also discusses the gambling aspects of stock investing. We have already spent time with his book, The Nature of Risk, Stock Market Survival and the Meaning of Life, exploring the effect on us of our childhood angels, or demons if you prefer. You may remember that he characterized Americans not as basically optimistic, but rather as perpetually hopeful. He compared an investor to a sports fan in a search for excitement as follows:
The cliches of daily life are those of routine, discouragement, tiredness; of the rat race; of a cold, the IRS. Guys root for dreadful teams for years - keep buying season tickets in the hope that eventually they'll own seats for the Super Bowl or World Series. And better than being a sports fan - because you can actually participate - and even better than gambling - because it is socially acceptable - playing the stock market becomes a way out of an otherwise mundane and stressful environment. It has glamour, plus the chance of improving one's lot without being an overt bet. There's an excitement to it, along with the illusion that a successful investment is almost within reach, if one only knew how to use it. The market seems to represent hope itself.
I must take issue with Mr. Mamis' comment that an investment is not an overt bet. It most certainly is. The fact that it is a bet does not make it illegal, immoral or fattening. It is what it is, and an investor should just accept it. If however, an investment is made, regardless of the rationalization behind it, just to participate in the market's excitement, then losses will almost surely follow.
Fishing, to those who don't, looks to be a rather dull activity consisting of either throwing a lure into the water repeatedly or just sitting and watching a floating bobber. Those who fish know the slight, hopeful tension experienced with each cast or with each dip of the bobber - maybe this time a fish will take your bait and run with it. Regardless of the degree of professionalism behind a stock purchase, I suspect that many investors share that same hopeful excitement with the fisherman - maybe this time the market will take your stock and run with it.
Making a stock purchase or waiting for that last card - they both have a common element, each is a bet on the future. Facing the unknown always generates a certain level of emotion. It's just part of Professor Keynes' Game.
In the next post, we will learn the vocabulary of Wall Street. For some, this will be old hat. For others, this will explain the terms we'll use when we explore strategies of investing.
Feel free to click the comment link below, add your thoughts and pick the "Anonymous" profile. You can also add your name. All comments are posted within 24 hours of receipt and replied to on Fridays.
Excerpts from The Money Game by Adam Smith, copyright 1967, 1968, are used with permission of Random House, Inc. Excerpts from The Nature of Risk, Stock Market Survival and the Meaning of Life by Justin Mamis, copyright 1991, are used with permission of Mr. Mamis and Fraser Publishing Company.
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