Book Analysis: Risk and Return: Or How to Live with Wall Street

"To some men speculation means a way to accumulate money without menial or physical labor - to the inexperienced only!"

In Robert Lee Sharp and Wallace H. Matlock’s succinctly sarcastic 1951 book titled Risk and Return: Or How to Live with Wall Street, they both assume the role of a stereotypically smug speculator, who “trades in his own way and he trades alone by preference.” Sharp and Matlock invoke such arrogance in order to satirize Wall Street’s modus operandi (i.e. speculation) in nine simple steps.

They take a close look at the basis for a broker’s allegedly superior performance, the ability to quickly decipher ticker tape markings. This reading was used for developing the analytical prowess needed to determine the supply and demand relationship in the marketplace in order to act quickly by “taking a position either long or short.” However, owing to the fact that tape reading is “1% looking and 99% thinking” about what has already occurred, all one can make from it is an educated guess at best.

Unfortunately, this type of influential fortune-telling device can induce mood shifts, similar to “manic depression.” This leads a speculator to feel either “bullish” (brave) or “bearish” (scared). When the market has risen, he feels “brazenly bullish” to buy stocks. When the market has declined, he feels “chicken-heartedly bearish” and hits the sell button. This explains the herding behavior so often seen among speculators.

Sharp and Matlock outline the dangers of such emotions-based trading by way of illustrating “Cutbottoms, Gaps, and Shakeouts.” The typical gap usually expires within a few hours to a few days; giving an amateur speculator time to perform the ever-so-popular “shakeout” (as pictured on the bottom). On the “professional” side of the exchange floor, the party is far from over, as they keep finding opportunities “to pick up stock or get out of shorts at their leisure and at the best possible prices,” allowing them to profit at the amateur’s expense. As the old adage says, “A fool and his money are soon parted.”

In the midst of all the market commotion, amateur speculators strive to protect their “floor” positions by way of “stop-loss” orders and “scalping.” Stop-loss orders amount to mere “gambling in stocks-gambling that is mathematically certain to cause him a large net loss in his operations.” Sharp and Matlock criticize scalping which they assert “produces one trading crisis after another without rest in between...Rationale for such foolishness lies in newspaper headlines, boardroom rumors, a secret tip...all of which belong in the ash can!"

Sharp and Matlock trace back the idea of market manipulation to approximately 1940 B.C.E. when a Babylonian King decided “to rescind the economic law of booms and panics by fixing the prices of labor and farm products,” yielding shortages and famines.

Sharp and Matlock draw interesting parallels between the “tips and turns” of the human body and the free market economy which are similar in that they both experience depression and prosperity in naturally recurring phases. During the depression phase, the “crowd” starts to lose faith in the free market due to the higher unemployment, lower wages, and the resulting higher level of bankruptcies. The last phase of this “economic pseudo-cycle” is “…higher wages, larger profits, and larger capital gains.”

A speculator will only find success on Wall Street if he can outperform the professional traders. According to Sharp and Matlock, this can best be done by acquiring and maintaining professionalism, collaboration with an investment advisor, finances, covering one’s short position, selling the long position, fixed-value investments, entering long positions gradually, and last but not least confidence. Following these rules just might make one exceptionally rich- “if God permits.”

Sharp and Matlock explain that most speculators don’t have any kind of special insight into the market. Every now and then an amateur speculator may get lucky and acquire some gains, but the bulk of the money goes to the professional broker who takes home most of the profit in the form of commission and margin interest payments. It reminds me of the word “fugayzi” as it was used in this famous scene from The Wolf of Wall Street.

All of this “brouhaha” starts with the determination to earn “big money.” As riveting as such a goal might seem, both Sharp and Matlock emphasize the importance of its value in stating: “if held in substantial quantities relative to the wealth of others in the environment, money makes its master a veritable arbiter of others.” This means that money essentially puts people in powerful positions in which they have much more influence in resolving disputes. Unfortunately, many don’t get the chance to rise to such a level, owing to the fact that they are still entrenched in the fruitless endeavor of speculation which after a while zaps their hard earned cash.

Given that speculation is a non-starter, what should an investor do? Sharp and Matlock answer that question in the drawing below.

I interpret “investment counsel” to mean an advisor who can prevent you from succumbing to the temptation to engage in speculation.