1. Money
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I'm reading a marvelous 80+ year old book called Where are the Customers' Yachts? that has gone through several reprints and long served as a warning against the "kindergarten" that is Wall Street. Written in an almost satire-like tone, there is a great section in the third half of the book that asks each would-be investor to pose six questions to themselves and answer them correctly. If he's unable to answer "yes", or has to hesitate, then he should count the answer wrong.

Here's what the author has to say ...

1. Do you perceive quite clearly what is the objection to playing a roulette wheel that has two zeros on it? (If not, don't bother to be a financier; be a roulette player.)

2. If a man has tossed a coin "heads" four times in succession, which do you think he is more likely to toss the fifth time, heads or tails? (If you think he is more likely to toss either heads or tails, look into the interior-decorating game. You have that instinctive type of mentality which might do very well at that.)

3. When do you consider that it is a good purchase to draw one card to an insight straight? (Answer - when you are playing for soybeans.)

4. If you have answered #3 correctly, do you find that when you are actually playing poker for money, you can always resist making that draw? (If not, stay home with your money and start practicing being a miser.)

5. If a stock which is not paying any dividend is split two for one, how much good does that do the stockholder? (If you think it does him any real good, come down and join our sales department but steer clear of our trading department.)

6. What is the primary purpose of a business enterprise? This questions is specifically for young men considering entering the banking field, where they will have a constant parade of business propositions passing before them, and they will be required to plump for a few of them and say "no" to the others. The answer is elementary and obvious: the primary purpose of a business is to make money. Almost anyone knows this with the top part of his brain. But there are only a few valuable young men who also know this all up and down their spinal column. Most businessmen imagine that they are in business to make money, and that this is their chief reason for being in business, but more often than not they are gently kidding themselves. There are so many other things which are actually more attractive. Some of them are: to make a fine product or to render a remarkable service, to give employment to revolutionize an industry, to make oneself famous, or at least to supply oneself with material for conversation in the evening. I have observed businessmen whose chief pre-occupation was to try to prove conclusively to their competitors that they themselves were smart and that their competitors were damn fools - an effort which gives a certain amount of mental satisfaction but no money at all. I have even seen some whose chief interest lay in proving this point to their partners. So give yourself a real good mark if you know that a business should make money, but only if you really know it.

Had investors heeded this simple advice, the credit crisis wouldn't have happened, the dot-com bust wouldn't have occurred, the Nifty Fifty wouldn't have done so much damage to a generation of investors; you get the idea.

Comments
May 2, 2008 at 6:39 pm
(1) messels says:

hey, interesting post! i’m not too sure of your conclusion there at the bottom. i’m pretty sure the banks making all those loans believed they were in the process of making themselves rich (i.e. making money!). well, i guess i see what you’re saying. i mean, you’re just addressing the speculative side of the recent boom-bust, right?
maybe i’m just being obtuse …

April 1, 2010 at 5:34 pm
(2) Contessa says:

Hey , Happy Fool’s Day!!!

Patient: My hair keeps falling out. What can you give me to keep it in?
Doctor: A shoebox.

Happy April Fool’s Day!

May 19, 2010 at 3:12 am
(3) jeff montanye says:

in the third half of the book?

January 14, 2011 at 10:59 pm
(4) Amani Shaty says:

Our recent history of boom and bust was mostly caused by loose monetary policy engineered by the Fed and the US government to maintain an artificial economic boom despite the lingering malinvestment caused by our flawed fiat money system. The entrepreneurs and financiers were merely deceived by the illusion of available capital created by the central bank. These people acted ” rationally” in their own self interest, which led to a mania and the logical crash that ensued was predictable and had been predicted by very capable free market economists.
Now, where are customers yatches? Nowhere because they too are being misleaded by the dreams of easy wealth on the stock market rather than understanding that the business of stock investing is not 1-easy; 2-you can loose your skin in that game, 3-you must be careful and do your own homework, 4-never trust anyone with your hard earned money, 5-focus on what you do best.
Fundamentally, people lose more money in a bubble than when the economy is sound and I think that it is important for economist and investors to realize that the real way for people to gain economically is through value creation and economic productivity. When the society is productive, people gain in purchasing power and increase their standard of living. Investing in the stock market is therefore a marginal way to increase one’s wealth, not the ” EASIEST” as it is often marketed by pundits.

March 18, 2011 at 9:19 am
(5) bob says:

Book was written in 1955 not the 1920′s Duh

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