Portfolio 10

Where are the Customers' Yachts? or A Good Hard Look at Wall Street

Portfolio 10

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,

“Look, those are the bankers’ and brokers’ yachts.”

“Where are the customers’ yachts?” asked the naïve visitor.

--Ancient story

So begins Fred Schwed’s marvelous classic, Where Are the Customer’s Yachts?, which is now part of the IFA book collection. If you do not have the good fortune to acquire either the original 1940 edition or the 1955 Bull Market edition, you can pick up the 2006 edition from Amazon which will give you the benefit of Jason Zweig’s and Michael Lewis’s delightful introductions.

While I could easily fill up this blog with poignant and hilarious quotations (I earmarked at least fifteen of them), I thought instead to focus on a few of Schwed’s remarkable insights and what they teach us. Below we have Schwed’s analysis of verb tenses used to describe market movements:

“There are a couple of common phrases which do their share in perpetuating this ancient vicious practice of buying them [stocks] when they are high and selling them when they are low. These two phrases are the usual reply to the inquiry, “What is the market doing?” The answering phrases are—“It is going up,” or, “It is going down.”…It is a fair thing to say of a piston, an elevator, or a golf ball at a certain moment that it is “going up.” This suggests not only that it has been going up, but that it will probably continue to go on up, for a little time at least, because whatever impulse started it is still operating to some extent. But it is not a fair thing to say of the stock market, which, not being a physical thing, is not subject to Newton’s laws of propulsion or inertia. Unfortunately most of us unconsciously credit this false analogy, Thus we are not tempted to buy unless they [stocks] are “going up” or to sell unless they are “going down.” But when the market is “going up” like fury, there is no reason to believe that the very next “tick” is more likely to be up than down.”

After having gotten up from falling out of my chair when reading this, I almost felt it unfair that Professor Eugene Fama received the credit for formulating the random walk theory of stock market prices when Schwed so clearly articulated it (albeit without the equations) twenty-five years earlier. Following in Schwed’s footsteps, IFA’s founder and President Mark Hebner has never failed to correct any of us when we fall into the “going up or down” trap, and it has happened to the best of us.

Schwed devotes a full chapter to investment trusts, one of the forerunners of today’s mutual funds. Concerning the question of whether investors can benefit from the professional management of these trusts, Schwed posits the following:

“If the basic investment-trust idea is even half as sound as it appears to be, the average investor has virtually no excuse for buying any securities but investment-trust shares. The question may be put this way, using golf; if it was very important to you to win the class B championship at your country club and the rules permitted you to hire Gene Sarazen [the Tiger Woods of his day], at a reasonable fee, to make the shots for you, wouldn’t you be an egotistical fool to insist on playing the shots yourself? This would be an airtight analogy, except for one thing. Mr. Sarazen is superior to you and me at playing golf, and he can demonstrate this superiority every time he steps onto the first tee. But thus far in our history there has been little evidence that there exists a demonstrable skill in managing security portfolios.”

Ka-boom!!! That is the sound of Wall Street’s raison d’être getting blown to smithereens. Once again, Schwed anticipated a devastating conclusion decades before it was formalized in academic studies such as Michael Jensen’s landmark 1967 paper, “The Performance of Mutual Funds in the Period 1945-1964.”1

As with so many other books of the financial humor genre (e.g., Where the Money Grows by Garet Garrett), Schwed’s book shows us how little has changed over the decades. While ticker tapes may have gone the way of the buggy whip, greed, fear, and naiveté are still the norm. If my heartfelt endorsement fails to convince you to read this book, take it from Jason Zweig, “Schwed’s is the only financial book, out of the hundreds I’ve read, that will provoke you , teach you, and crack you up all at once.” 

1Jensen, Michael C., The Performance of Mutual Funds in the Period 1945-1964 (May 1, 1967). Journal of Finance, Vol. 23, No. 2, pp. 389-416, 1967.


View more information about the book and some of the illustrated inside-pages from IFA Book Collection

Where Are The Customers Yachts?
First Edition

Where Are The Customers Yachts?

Second Edition