As a collector of investment books, I came across a lost volume written in 1919 as a satire on the stock market.
Satire’s of Wall Street were all the rage in the period right up to the crash of 1929. After the crash books on stock trading tended to be about how Wall Street was full of crooks. So it appears that the difference between comedy and tragedy in the stock market narrative is merely down to the participants profit and loss.
The slim volume, Letter’s to my Broker stars a rich but clueless trader who is quiering his broker on how he seems to end up worst off with every deal. It throws up main lessons as true today as they were as the treaty of Versailles was being signed.
Here are 5 biggies:
Investor psychology doesn’t change.
Joe’s problems are smack up to date. There is nothing out of date about why he is losing money.
Forget online trading, forget the regulators, forget all the new rules and regulations, traders do today what Joe did nearly a 100 years ago.
They follow the same crazy notions, driven by the same emotional drives and flip flop in the same way. Forget TV, forget the internet, forget radio, these world shattering technologies haven’t changed the way we behave in the stock market one jot.
This means the cycle of boom, bubble, bust and repeat simply can’t change. So if you want to know the future, just look to the past and squint, because there it will be, the same outcome but just a little bit blurry.
….even the type of companies don’t change.
You would have thought at least the companies would be radically different. No there were rampant technology companies in 1919, no silicon chips in site but there was Ford and GM.
There were incredible mining operations too. There were companies long since defunct, who had antecedence just like them, which became defunct and had antecedents and so on.
There was an Apple for every generation.
Rampers are going to ramp
Back in 1919 Joe was always falling for the latest stock ramp. Stocks that go up like a rocket have a special fascination the trouble is they come down like a stock.
Rampers are pestilential in the stock market today. They aren’t just trolling the bulletin boards of Yahoo and Investors Hub, they are everywhere. Stock promotion is as old as stocks themselves and the technique was just as effective when it was put about by word of mouth as it is today by spam.
“Talking up ones book” has even become a gentle metaphor for lying in one own self-interest. “Stock promotion,” will never go away and as such the talking up of a stock should be automatically discounted. Not many people across the years can resist the ramp, so there is money in being deaf to it.
Bashers are going to bash
The flip side of promoting is “bashing,” the act of spreading information, true or otherwise, to knock down the value of a stock.
Short sellers spread negative gossip is not a new art form. Stock bashers, imaginary or otherwise have been banging away at reputations as long as there have been rampers singing stocks praises to the skies.
as an investor needs to discount praise of a stock so they should treat negative comment with huge skepticism as well. Sadly there may never be a time when people simply examine a balance sheet for guidance, rampers and bashers will always have the full attention of the market.
Volatility is compelling but not good for your wealth.
Speculators as traders used to be called, love volatility, but volatility is what sensible investors should avoid. Volatility is a kind of instability that spells danger. In the same way as speculators are drawn to excessive risk since the days of the London coffee houses of the 1700s, sensible investors are best heading the other way. Investors over the ages have been lured and are naturally draw to play incredibly risky games and nothing seems able to dissuade them.
Most people who play the market do so with the dream of getting rich quickly. This has always been the recipe for getting poor fast. Most savers, according to my researches consider the stock market too risky for their savings and they are right. However it is not the market that makes investing risky but the attitude of the people who are attracted to it. The market is not inherently high risk; it is that people want to play a high risk game that draws attention away from lower risk stock investments.
Burton Malkiel in his classic “Random Walk down Wall street” recommends an investor to buy and hold index ETF as an antidote to the seductive siren call of wealth destroying trading and speculative stock picking.
Harrah you might think, sanity in the market.
So what happens, soon enough there are leverage ETF funds all about intraday trading the very same indices, offering all the toxic characteristics that the boring index trackers were created to avoid.
In 1919 Joe would have loved them.
Be it in 1720, 1820, 1920 or 2013 what traders really want to know is what is the next hot stock. What investment books of the past teach us, is nothing has changed or will change in that behaviour. We are blessed and doomed to enjoy and suffer more booms and busts to ahead. What’s more, how they pan has already been sketched out over the many iterations in the past.