Where Are The Customers’ Yachts?

There Are Certain Things That Cannot Be Adequately Explained To A Virgin Either By Words Or Pictures. – Fred Schwed Jr.

There are few investing books, which have not lost their relevance after more that 15 years of publication. One of the books from that category is “Where are the Customers’ Yachts?” by Fred Schwed Jr. Fred was once a trader, who lost pretty much everything and later he wrote a sensational book on stock market and investing. His philosophy is just as vivid now and it will be a hundred years from now.

Unlike most of the recent investing books, which sight the perfect hindsight statistics of the stock market movement, something like- Had you bought this stock in xx date, you would had earned xx return, this book will not make you salivate with the alchemist-type return from the crest to trough of the stock performance graph. In fact, you will hardly see any numbers in his book.

The main two highlights of his book are:

Stock Price Forecasting

One of the major part of the business of Wall Street has become the foretelling of price moves. All these things are demonstrably unpredictable. You can easily check this from your won experience. Stock price forecasting does not work.

In his own word.

If you ask Joe why there will be a little rally after lunch, he will tell you in no uncertain terms. He will say that he observes that the volume is decreasing on the down side, that he can see that steels are strongly pegged just above the last previous lows, and that “they” (whoever “they” are) are beginning to accumulate second-grade carriers.

“Speculation is an effort, probably unsuccessful, to turn a little money into a lot. And Investing is an effort, which should be successful, to prevent a lot of money from becoming a little.” – Fred Schwed Jr.

For one thing, customers have an unfortunate habit of asking about the financial future. Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers – “I don’t know.”

I found this funny yet true!

The average male likes to sit at breakfast and tell his wife and children what Adolf Hitler is going to do month after next.

Margin Trading

Another stunning discovery of the market, the Margin Trading, does not work for an average investor. This is no less evil than the price forecasting. Nor are you an investor if you obsess about the price of a stock but know nothing about the value of the business it represents.

Like all of life’s rich emotional experience, the full flavor of losing important money cannot be conveyed by literate. Art cannot convey to an inexperienced girl what it is truly like to be a wife or mother. There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.

In the late 1990s, many traders did no research on companies, learning nothing but the ticker symbols of whichever stocks – CMGI, DCLK, WBVN were going up. Who ran the company? What did it make? Was its business profitable? Who cared, so long as the stock kept rising?

Availability Bias In Action

A common investors like me have a ton of emotions and most of the times those emotions are quite counterproductive when it comes to investment performance in stocks. One of that emotion is termed as Availability Bias. Availability Bias means we tend to give more importance to the information or facts that are most frequently or readily or currently available to us.

I think I am the most frequent victim of this emotional force. After reading the Book “Where are the Customers’ Yachts?”, my futuristic market view, all of a sudden, fades away and it becomes dull. I could not stop myself to become a victim of this natural, must have force. I started imagining a recession and depression. My imagination of those dark times pushes me to act. And I do act. The result – My cash reserves increases.

Here is the summary of my portfolio.

Being a value investor is painful especially during the bull market. And even more painful is to be on the sideline with pocket full of cash, but it is not as bad as losing a big chunk of it while speculating.

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