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.
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 aren’t 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 Schwed’s wisdom, developed long before the days of hedge funds and exotic derivatives, still holds true. There’s 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, it’s much better than the alternatives. His central point is that markets are unpredictable. That doesn’t matter if you’re investing for the long haul, because all the major stock markets perform well in the long term – it’s 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 Schwed’s day. That shouldn’t 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 Schwed’s book is like meeting a friend, and it’s a great feeling to realise that not everyone in the markets, then or now, is a money-obsessed barbarian.