~ Saturday, December 10, 2022 Blog Post ~
One of my favorite investment-related quotes is by Fred Schwed, Jr. He cited that:
“Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”
I must remark that Schwed made perfect sense in his statement. I believe his quotation above enlightens novice investors regarding the significance of investing their hard-earned money for their and their families’ long-term financial benefit.
Fred Schwed, Jr. was an American stock broker. He is famous for writing a book on Wall Street titled, “Where Are the Customers’ Yachts?: Or A Good Hard Look at Wall Street.”
Schwed’s book “Where Are the Customers’ Yachts?: Or A Good Hard Look at Wall Street” was published by Simon and Schuster in New York in 1940.
Well-known investment and finance figures like Warren Buffett, Michael Lewis, and Jack Bogle have cited this tome as among the most authentic, hilarious, timeless, and genuine descriptions of Wall Street and investment firms’ culture.
According to a May 11, 1966 New York Times article, Schwed passed away on May 10, 1966 in Norwalk Hospital in Connecticut. The author and humorist was 64 years old and had lived in Rowayton for 25 years. Schwed had been a resident of a sanitarium in Stamford since suffering a stroke in 1960.
How to Die Rich
By James Grant, September 2, 2002
Fred Schwed’s 1940 classic has the key: Sell stocks in a bull market, and buy in a bear market. But the trouble is, investing pits heart against head. The head always loses.
In times of trouble, a good book is a friend and a consolation, the next best thing to money. Is this the bottom of the bear market? Where Are the Customers’ Yachts? by Fred Schwed Jr. (John Wiley & Sons), a title I mentioned in my previous column, indirectly furnishes an answer.
In 1940, the year of the first edition, the bottom might have seemed fathomless. The German army was occupying Paris and the U.S. stock market was in its second consecutive losing year (1941 would make it three).
Experience had taught Schwed, a former stock broker, that most investors (i.e., the “customers” in his book title) owned no yachts. He had seen for himself that capital was more often consumed in poor businesses than propagated in good ones. His first-class investment mind was as fully conditioned by a bear market as the contemporary Wall Street mind has been conditioned by a bull market.
Even so, Schwed was not against common stocks. Rather, he was against overpriced common stocks. He would have disputed that equities automatically excelled “in the long run.” Instead, they tended to excel when a careful investor bought them at a fair price, not (as in the late boom) at any price.
“For no fee at all,” wrote the author, anticipating the question to which we are all dying to know the answer, “I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it.
“When there is a stock market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them,” he elucidated. “Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this — just wait for the depression which will come sooner or later.” The master continued: “When this depression — or panic — becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.”
Of course, nothing could sound easier. And nothing could be harder. Successful investing is a psychological trial, a pitched battle between the heart and the head. Then, as now, the heart was the odds-on favorite.
“I suspect that there are actually a few people who do something like this,” Schwed went on, “even though I have never had the pleasure of meeting them. I suspect it because someone must buy the stocks that the suckers sell at those awful prices.”
Long before New York State Attorney General Eliot Spitzer lambasted Wall Street analysts for their moral failings, Schwed lampooned them for their intellectual shortcomings. The greatest of these flaws, he pointed out, was the pretense that they, or anyone, could predict the financial future. After all was said and done, the best brokerage-house investment advice boiled down to this: “[B]uy them when they are up, and sell them when the margin clerk insists.”
“It is obviously impossible for the thinking Wall Streeter to avoid acting on that principle,” Schwed continued. “He certainly can’t buy them when they are down, because when they are down ‘conditions’ are terrible. You can’t ask an experienced Wall Street man to buy stocks when carloadings have just hit a new low and unemployment is at a peak and steel capacity is less than half of normal and a very big man — of course, I can’t tell you his name — has just informed him in confidence that one of the big underwriting houses in the Middle West is in really serious trouble.
“Unfortunately for everyone concerned,” Schwed wound up, “these are the only times when stocks are down. When ‘conditions’ are good, the forward-looking investor buys. When ‘conditions’ are good, stocks are high. Then, without anyone having the courtesy to ring a warning bell, ‘conditions’ get bad. Stocks go down, and the margin clerk sends the forward-looking investor a telegram containing the only piece of financial advice he will ever get from Wall Street which has no ifs or buts in it.”
Conditions today are fast deteriorating, and — despite the occasional sucker’s rally — the bear market has almost become, in Schwed’s parlance, a “national catastrophe.” In my judgment, the broad market is still far from cheap, but it’s making steady progress in that direction. At this rate, it will once more become possible to die rich. (Although hard to find in stores, Schwed’s book is available at various Web sites, such as amazon.com and barnesandnoble.com.)
James Grant is the editor of Grant’s Interest Rate Observer. Find past columns at www.forbes.com/grant.