Gough Leo - Fred Schweds Where are the customers yachts?: a modern-day interpretation of an investment classic

INTRODUCTION

In 1940 Fred Schwed, a stockbroker whose father had lost everything as a short seller on Wall Street during the Roaring Twenties, published this timeless classic on how the stock market really works. Schwed, a pleasure-loving, cultured man who had been expelled from Princeton University in his final year for entertaining a lady in his room after 6pm, had a deep understanding and few illusions about the world of investment. He had seen the ups of the 1920s boom and the downs of the 1930s Depression, and his insight into the psychology of investment professionals and their customers is as relevant today, in the current financial crisis, as it was in 1940.

The title of his book, Where are the Customers Yachts?, refers to an old joke: a tourist is being shown all the fancy boats in the harbour, and is told, These are the bankers yachts, and these are the stockbrokers yachts. When he asks, innocently, Where are the customers yachts? he is told that there arent any (in other words, the customers have not got rich from the stock market).

Schwed is very far from being a cynic, however. He is not saying that investment is pointless, or that private investors never make any money. Rather, he is casting doubt on the ability of the financial services industry to provide any really valuable advice to its customers.

In recent decades great strides have been made in the theoretical understanding of financial markets, but Schweds wisdom, developed long before the days of hedge funds and exotic derivatives, still holds true. Theres a humorous gem on almost every page that strikes a very familiar chord, from the story of the highly paid economist who lugs huge briefcases full of documents to conferences (but never opens them), to the gentle dig at the tendency of analysts to develop a prose style which would make a nineteenth century German metaphysician envious.

Fred Schwed had a sneaking fondness for that wretched old hag, the capitalistic system; in his view, its much better than the alternatives. His central point is that markets are unpredictable. That doesnt matter if youre investing for the long haul, because all the major stock markets perform well in the long term its trying to do better than average, says Schwed, that causes all the trouble.

The follies, the frauds, the fads and the scandals of today are remarkably similar to the ones in Fred Schweds day. That shouldnt come as a huge surprise, when you read the way that this charming, sophisticated writer deals with the issues of the 1930s and 40s, the truth of the axiom that people never seem to change really hits home. As Michael Lewis says in his foreword to the 1995 edition, I like to think that when I first stumbled across this delightful little book the ghost of its author stumbled right along with me, with a gin and tonic in his hand. Reading Schweds book is like meeting a friend, and its a great feeling to realise that not everyone in the markets, then or now, is a money-obsessed barbarian.