Book Notes: 'Adam Smith' - The Money Game



The Money Game is "about Image and Reality and Identity and Anxiety and Money". If you don't know Who you are, this is an expensive place to find out. "The first thing you have to know is Yourself. A man who know himself can step outside himself and watch his own reactions like an observer."

The money which can preocuppy so much of our consciousness is an abstraction and a symbol. The Game we created with it is an Irrational one, and we play it better when we Realize that, even as we try to bring Rationality to it.

"You and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes...We are all at a wonderful party, and by the rules of the game we know that at some point in time the Black Horsemen will burst through the great terrace doors to cut down the revelers; those who leave early may be saved, but the music and wines are so seductive that we do not want to leave, but we do asked, 'What time is it? What time is it?' Only none of the clocks have any hands."

The small investor is a loveable fool, and the professional manager is a worldly riverboat dealer; find smart people, the small investor is told...That is like Ben Graham saying, "Many shall be called to honor that now are fallen."

The stock doesn't know you own it. Prices have No Memory, and yesterday has Nothing to do with tomorrow. If you really know what's going on, you don't even have to know what's going on to know what's going on".

When J.P.Morgan was asked What the Market would do, he said, "It will Fluctuate".

I. YOU - Identity, Anxiety, Money

The world is not the way they tell you it is.

Mr. Smith asked in "The Theory of Moral Sentiment": "To what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power, and pre-eminence?""

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 prepensity the appropriate toll"

I think the Market is both a game and a Gamem i.e. both sport, frolic, and play, and a subject for continuously measurable options.

If you are a successful Game player, it can be a Fascinating, Consuming, totally Absorbing experience, in fact it Has To Be. If it is Not totally Absorbing, you are Not likely to be among the most sucessful, because you are competing with those who do find it so Absorbing.

Samuel Johnson said, that No Man is so Harmlessly Occupied as when he is Making Money. The irony is that this is a Money Game and Money is the way we keep score. But the real object of the Game is Not Money, it is the Playing of the Game itself.

Mr. Gerald Loeb, author of The Battle for Investment Survival: "There is No such thing as a final answer to security Values. A dozen experts will arrive at 12 different conclusions. It often happens that a few moments later each would alter his verdict if given a chance to reconsider because of a changed condition. Market Values are fixed only in Part by Balance Sheets and Income Statements; much more by the Hopes and Fears of humanity; by Greed, Ambition, Acts of God, Invention, Financial Stress and Strain, Weather, Discovery, Fashion and numberless othe Causes impossible to be listed without omission."

As Mr. Loeb says, Value is Only one part of the Game. I am not putting down the study of economics, business cycles, and even security analysis. But knowing them does Not guarantee success.

Mister Johnson says, "The market is like a beautiful woman - endlessly fascinating, endlessly complex, always changing, always mystifying...It is an Art. Now we have computers and all sorts of statistics, but the market is still the same and understanding the market is still no easier. It is Personal Intuition, Sensing patterns of Behavior. There is always something Unknown, Undiscerned."

What is it the Good Managers have? It's a kind of locked in Concentration, an Intuition, a Feel, nothing can be schooled. The First Thing you have to know is Yourself. A man who knows himself can step outside himself and watch his own reactions like an observer.

Positive Decisions have to be made by an Individual; Group Can't do it.

Mister Johnson said, "The market is a Crowd, and if you've read Gustave Le Bon's The Crowd you know a crowd is a Composite Personality. In fact, a crowd of men acts like a single woman. The mind of a crowd is like a woman's mind. Then if you have observed her a long time, you begin to see little tricks, little nervous movements of the hands when she is being false."

There are fundamentals in the marketplace, but the unexplored area is the Emotional area. All the charts and breadth indicators and technical palaver are the statistician's attempts to describe an Emotional state.

It may seem a little silly to think that a portfolio of stocks can give you a portrait if the man who picked them, but any tuned-in stock-picker will swear to it.

The Small Investor has the Reaction without the Knowledge. He has no "aperceptive mass" behind the reaction; the Portfolio Manager can remember the profit margins of a hundred companies, how the stocks react to a variety of situations, and where in the spectrum of managers he himself fits. If he knows these things, he can be away from the market and still know where its rhythm and his are meshing. In short, If You really Know What's going on, You Don't even have to know What's going on to Know What's going on.

There is one requirement that is absolute in Money Managing: If You Don't Know Who You Are, this is an Expensive place to find out. The requirement is Emotional Maturity.

Dr. McArthur says, "You have to use your Emotions in a useful way. Your Emotions must support the Goal you're after. You can't have any conflict about what you're after, and your emotional needs must be gratified by succeeding at what you're doing. In short, you have to be able to handle any situation without losing you cool, or letting your emotions take over. You must operate without Anxiety."

IS THE MARKET REALLY A CROWD?

What the crowd - or the public - or the market is up to is always a subject of speculation, for the crowd, according to investment mythology, must always be wrong. (The believers in this rule are numerouse enough to constitute a crowd, but of course anyone speaking of the crowd believes himself to be outside of it.)

A crowd was not merely a number of people assembled in one place; it could be thousands of isolated individuals. These he (Gustave Le Bon) called a psychological crowd, subject to "the disapperance of conscious personality and the turning of feelings and thoughts in a different direction." The most striking peculiarity of a crowd, said Dr. Le Bon, was that: "whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation."

What do we know about a Crowd? The first thing we know is that an individual in a crowd acquires - just from being in a crowd - a sentiment of invicible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint...the sentiment of responsibility which always controls individuals disappears entirely. The second element in Le Bon's crowd was Contagion. And third element was Suggestibility.

Crowds are everywhere distinguished by feminine characteristics. A Crowd of men acts like a single woman.

Dr. W. McDougall said, the chief characteristic of the crowd was "the exaltation and intensification of Emotion". The crowd is "excessively Emotional, Impulsive, Violent, Fickle, Inconsistent, Irresolute, and Extreme in Action...extremely Suggestible, Careless in deliberation, Hasty in Judgment, Incapble of any but the Simpler and Imperfect forms of Reasoning...like an unruly child".

No one after these few remarks, will ever want to be part of a crowd again, and yet the fact is that it is really quite comfy to be part of the crowd.

"80% of the market is Psychology. Investors whose actions are dominated by their Emotions are most likely to get into trouble."

YOU MEAN THAT'S WHAT MONEY REALLY IS?

The Investors who really follow the market, the ones who call up all the time, 90% of them really don't care whether they make money or not.

WHAT ARE THEY IN IT FOR?

- Cuddling Comsat

- I want to be loved for myself

- Was I dumb! Was I dumb! Kick me!

- IBM as religion: Don't touch, Don't touch

- The broker as witch-doctor

- Can I tell Rosalind? Can I tell Harriet?

- They make me do everything wrong

...The Investors are in the market for something else.

IDENTITY AND ANXIETY

No matter what role the investor has started with, in a climax on one side or the other the role melts into the crowd role of greed or fear. The only real protection against all the vagaries of identity-playing, and against the final role of being part of the crowd when it stampedes, is to have an Identity so Firm it is not influenced by all the brouhaha in the marketplace.

Anxiety is the threat to Identity. To avoid anxiety you have to know who you are and what you're doing.

If you know that the stock doesn't know you own it, you are ahead of the game. You are ahead because you can change your mind and your actions without regard to what you did or thought yesterday; you can start out with no preconceived notions. Every day is a new day, providing a new set of continuously measureable options. You can live up to all those old market saws, you can cut your losses and let your profits run, and it doesn't even make you scar tissue itch because, being selfless, you are unscarred...The end object of investment ought to be Serenity.

Money, contrary to popular myth, does help people more than it spoils them, simply because it opens up more options.

WHERE THE MONEY IS

Really big money is not made in the stock market by outside investors. Who makes the really big money? The inside stockholders of a company do, when the market capitalizes the earnings of that company.

What is unique about a company is not Patents or Products...What is unique is always the same thing: it is People, the brains and talents of people. Sometimes these people produce patents, sometimes they produce a reputatiom for service; but always they produce something that cannot be easily duplicated by anyone else.

You do have to know What Time of Market it is. Markets go in Cycles like all the other rhythms of life...There is one other rule you ought to keep in mind, and that is to Concentrate, I mean in a Few Issues only...If you are concentrated in only a few stocks, you are forced to measure each of them in terms of potential against each new idea that comes along, and that in turn makes you bump the bottom stocks off - the worst performing ones - to take aboard something more promising.

For years, Phil Fisher espoused what he called "scuttlebutt" as the way to zero in on a new investment. You know a company; you talk to their competitors. You talk to the people who sell them things and to the people who buy things from them.

II. IT: SYSTEMS

CAN FOOTPRINTS PREDICT THE FUTURE?

Charts are a tangible, visible way of finding out, if not What is everybody else doing?, at least What has everybody else done?

Isaac Newton was not actually a Chartist, though they claim him as their own. One day after the apple incident, Isaac Newton said, "A body in motion tends to stay in motion, and a body at rest tends to stay at rest."

Without Isaac Newton, the pictures on the cave wall would have been simply that :Pictures. After Isaac Newton, the idea that these patterns could represent Motion became acceptable. Once it is accepted that the patterns can represent motion, it follows that a Trend is a Trend is a Trend until it stops being a Trend.

Point-and-Figure chart is a complete map of all the footprints a stock has made.

It is an informal thesis of charting that there are roughly 4 stages of stock movement.

1) Accumulation. The stock has been asleep for a long time, inactively traded. Then the Volume picks up and probably so does the price. At the stage of Accumulation, there were still enough Sellers around who were glad to unload the old dog finally to any fool willing to buy it.

2) Mark-Up. Now the Supply may be a bit thinner, and the stock is more avidly pursued by more Buyers, so it moves up more steeply.

3) Distribution. The Smart people who bought the stock early are busy selling it to the Dumb people who are buying it late, and the result is more or less a stand-off, depending on whose enthusiam is greater.

4) Panic Liquidation. Everybody gets the hell out, Smart people, Dumb people, "everybody". Since there is "no one" left to buy, the stock goes down.

In short, the market will not go up unless it goes up, nor will it go down unless it goes down, and it will stay the same unles it does either.

When everyone knows something, then no one knows anything; the market would soon become too "efficient".

Past patterns help determine future patterns; momentum can be shown on the charts. All chartists, to extrapolate and visibly to determine Motion, must draw some sort of a Line between the prices at various times...The thesis is that the stock is more likely than not to continue along that line. Never mind whether that "more likely" is 51-99%; that is the point at which the enemy attacks.

WHAT THE HELL IS A RANDOM WALK?

Prices have no memory, and yesterday has nothing to do with tomorrow. Every day starts out 50-50. Yesterday's price discounted everything yesterday.

You do notice 1 thing about the random-walk world and the chart world: there are NO people in them.

There are few rich random walkers, and few rich Chartists. But there are some quite successful investors around who have no particular system...they are better students of Psychology.

I would go on believing that in the long run future earnings influence present value, and that in the short run the dominant factor is the "Temper of the Crowd"

Technicians believe the only thing you have to know about the market is Supply & Demand; never mind Earnings, Dividends, Business Outlook. Supply & Demand show up in Price & Volume.

It isn't the Chart, it's the man who reads the chart...since if you take 2 Chartists and show them the same chart they will give you opposite opinions half the time.

We are sitting at our computer, and all the Theys are sitting at theirs. The name of the Game is: What Is Everybody Else Doing?

Here we are with a very comfortable maxim, a stock is going up as long as it's going up, a very serene way to be in the market. And since we are all watching each other, it is very comfy. This is called a Trend. And if we all stay with the Trend, then we have only to worry about how we will all get out when the Trend reverses.

WHAT DO THE NUMBER MEAN?

The translation of "generally accepted accounting principles" is "ABC could have earned anywhere from 50c a share to $1.25 a share..."

Numbers imply precision, so it is a bit hard to get used to the idea that a company's net profit could vary by 100% depending on which bunch of accountants you call in...Accountants are not some kind of super-authority, they are professionals employed by clients...Most Accountants are honorable men, trying to do a job. But they are hired by Corporations, Not by Investors.

In short, there is not a company anywhere whose income statement and profits cannot be changed, by the management and the accountants, by counting things one way instead of another.

This means real donkey work, digging out notes, making comparisons, finding the tunnels, and in general Unpainting the carefully painted picture.

On the other hand, as we have leanred, Truth will Not make ABC go Up, but the Crowd's general feeling about ABC just might.

A conglomerate is a company that grows by acquiring other companies, and the other companies, and the other companies can be in wildly different businesses....Wall Street does look for growing earnings, and with the right accountant this whole process can make the Earnings grow like crazy. Capitalism enters a new stage.

"It's not important what our company make. What is important is the Image, the Management, and the Concepts. Wall Street loves all three." In general, to create what Wall Street is looking for, which is a neat pattern of constantly growing Earnings.

WHY ARE THE LITTLE PEOPLE ALWAYS WRONG?

If all the numbers, accounting variations, computer systems, and infinite possibilities are beginning to bewilder you, there is 1 indicator that Professionals still use that is simple. That is to find out What the Average Investor (or the Little Investor) is doing. Then you do just the opposite.

The sophisticates never feel comfortable unless they can be reassured that relatively uninformed investors are going the other way with some conviction. It all has to do with Accumulation and Distribution. When the sophisticates are Accumulating, they have to be Accumulating from someone. and when they are Distributing, somebody has to be there to buy. The Little People are always Wrong, at least that is the way the mythology goes.

The depreciation of currency is a major world problem. The same goes for life insurance. The bucks you get out aren't the ones you put in. So you have to buy something that will Keep Pace.

III. THEY: THE PROS

THE CULT OF PERFORMANCE

You will notice 1 attitude in common: there is a THEY out there in the market.

Who are They? Well, They are the people who move stocks. They get the information first, maybe They even create the information, and They are about to put the stock up or down. They are mysterious, anonymous, powerful, and They know everything. They are the powers of the marketplace.

The Stage was all set for "Performance." Performance is just what it sounds like. It means your fund has performed better than all the other funds. Its net asset value went up a greater percentage. In other words, all the stocks of your fund went up more. The characteristics of Performance are Concentration & Turnover.

So there derives a great hunger for short-term information.

Increasingly, manager of mutual funds, and portfolio and pension fund administrators, are measuring their success in terms of relatively short-term market performance. In effect, they set a target on a growth stock, attain that target, unload, and the seek other opportunities.

There is obviously one genuine threat in "Performance" and that is the threat to Liquidity. All the funds simply can't get through the exit door at the same time. Liquidity is the cornerstone of the Market.

Lord Keynes had it all spotted in 1935:

"..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 keep", but with what the market will value it at, under the influence of mass psychology, 3 months or a year hence...For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you aso believe that the market will value it at 20 three months hence. Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced..."

LOSERS AND WINNERS: POOR GRENVILLE, CHARLEY, AND THE KIDS

We live in an age of charts and computers, and the thing about charts and computer studies is that they show what is moving, and if everybody plays this game, then what moves is what is already moving. The trouble is that unless you have peripheral vision and extrasensory perception, you get mousetrapped very easily.

The market does not follow logic, it follows som mysterious tides of mass psychology.

Anomie: means anxiety builds up as the market drops, and then as you get all the noise about "resistance levels" and so on, and the market goes plunging through them, and you get anomie. Nobody knows where the bottom is; nobody can remember the top was; they're all way out there in the blue, riding on anxiety and a shoeshine.

TIMING, AND A DIVERSION

Value is not only inherent in the stock; to do you any good, it has to be value that is appreciated by others...It follows that some sort of sense of Timing is necessary.

It may be all very well to say: When there's no game, don't play.


225 views
  • Facebook Social Icon
  • Twitter Social Icon

© 2016 by aTrader