This is a review of "Where Are the Customers' Yachts?" by Fred Schwed Jr. You can find all my previous book reviews here. If you're interested in buying a copy, I hope you'll consider using my Amazon Associates referral link.
I have a technique I like to call "reverse showrooming." In retail parlance, "showrooming" is when a customer comes into a physical store to inspect a product, then ultimately orders it for a lower price on Amazon.com. I "reverse showroom" by keeping track of books I'm interested in reading by adding them to my Amazon wish list, then checking them out for free from the public library.
"Where Are the Customers' Yachts?" is the first book I've ever checked out from the public library that was so good I immediately ordered 2 copies from Amazon in order to lend them out to friends and family.
It isn't the only book you'll ever need to read about investing in the stock market, but it should be the first book you read about investing in the stock market.
History doesn't repeat itself, but it rhymes
Fred Schwed Jr. originally published "Where Are the Customers' Yachts?" in 1940. Despite the intervening years, with all its wars and revolutions, there's scarcely a single word in the book that doesn't apply just as accurately today as it did when it was written (with one exception, below). Moreover, a vast corpus of economic research has developed to provide statistical proof for what Schwed learned from practical experience.
Schwed is much funnier than I am, but I will attempt to do justice to his basic attitude towards investing:
- Making predictions is hard, especially about the future;
- If someone can consistently and accurately predict future price movements, they are able to command vast sums for doing so;
- But even someone who consistently and accurately predicts price movements is almost certainly just lucky.
Schwed predicted almost every development in the world of investing
Decades of economic research have now established that active mutual funds perform no better than passive index funds, after management fees. But Fred Schwed doesn't need your decades of economic research. In 1940, he wrote:
"The subject of choosing profitable financial investments does not lend itself to competence. There is almost no visible supply."
It is breathtaking to read Schwed recommend — in 1940 — a primitive system of passive index investing:
"The average small investor needs a certain amount of diversification, but he can get it for himself by buying five-share lots instead of hundred-share lots. The added expense of doing his business this way is negligible. If his funds are too limited even for that procedure, the only diversification he needs is to put some of his money into life-insurance payments, some into the savings bank, and the remainder into his right-hand trouser pocket."
Michael Lewis catalogued the difficulties large investment banks have buying and selling large blocks of shares in his 2014 book "Flash Boys." Fred Schwed described them in 1940:
"An investment trust [i.e. mutual fund] should be good and large, because this tends to make the expenses of running it a negligible percentage of the whole. But when the trust is big in size, the investing problem becomes increasingly difficult. A fifty-thousand-share position is a hard thing to buy and usually a harder one to sell. If the quotation on such a position rises twenty points in the newspaper, the trust scores up a million-dollar profit on their book value, but of course actually realizing on profit on such a block is apt to be quite a different thing."
Schwed is curiously obsessed with margin investing
The only part of "Where Are the Customers' Yachts?" that doesn't seem as relevant today as it was when it was written is his discussion of "margin." Margin, for those born after 1930, refers to the regrettable willingness of brokers to allow their customers to buy stocks not with money, but with a line of credit backed by a small amount of collateral. As Schwed explains:
"We assume that it is a wise and profitable venture to buy 100 shares of United Fido at ten, paying $1,000 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."
While investing on margin is still legal and, I assume, encouraged by the more unscrupulous stock brokers, it doesn't occupy the American imagination in the way it seems to have when Schwed was writing. Although in fairness, Tim Geithner did something indistinguishable when he borrowed money from JPMorgan in order to back his stake at his new Warburg Pincus gig.
Let's check back in 10 years to see how that plays out.
In 76 years, investor psychology has changed not one jot nor tittle
Ultimately, "Where Are the Customers' Yachts?" is a book about psychology: specifically, the psychology of people who decide to put a little bit of money to work for them in the stock market. If you don't recognize yourself in it, then you've probably never put a little bit of money to work for you in the stock market.
Fortunately, you have one great tool Fred Schwed Jr. and his clients and customers didn't have and indeed didn't imagine: low-fee, passive, indexed Vanguard mutual funds.
Unfortunately, you can only take advantage of those funds if you can convince yourself to actually invest in them. And as much as it pains me to say it, neither Schwed nor I are going to be any help in that department.