Roulette

Wall Street: the other Las Vegas

Roulette

About a month ago, I wrote about Nicolas Darvas, a world famous dancer who claimed that he made $2 million in the stock market. This claim was vigorously disputed by the New York State Attorney General, Louis Lefkowitz. A write-up of the allegations against Darvas can be found here. While Darvas avoided prosecution, he did agree to never work in the U.S. securities industry. However, this did not stop him from writing a second book, Wall Street: the other Las Vegas. Although much of it is simply a recapitulation of the same drivel that fills his first book (e.g., “The only sound reason for my buying a stock is that it is rising in price.”), the extended analogy drawn between Wall Street and Las Vegas is both entertaining and informative.

Darvas portrays Wall Street as a giant casino populated by dealers (stock-brokers), croupiers (the administrators of the stock exchanges which could include the floor traders and specialists), touts (the brokerage firm analysts making their recommendations), and of course the winners and losers (the minority and majority of investors, respectively). Although his approach to investing could not be more different than Darvas’, John Bogle draws the same analogy when he depicts active investors playing a zero sum game which becomes a negative sum game after costs where the only sure winners are the “croupiers” (the financial services industry) whose annual take Bogle estimates at a staggering $600 billion.

In the eyes of Darvas, the dealers of Wall Street (i.e., the stock brokers) are a contemptible lot, indeed. Writing in 1964, well before the advent of discount brokers, Darvas illustrates the corrosive impact of trading costs on profits, and he repeatedly reminds us that regardless of whether a trade is profitable, the broker always makes his commission. Next up in the food chain are the people who run the Wall Street casino, the croupiers. As a prime example, Darvas brings forth Richard Whitney who was very much the Bernie Madoff of his day. A former president of the New York Stock Exchange during the time immediately after the 1929 crash, Whitney was discovered to have misappropriated over $5 million (a kingly sum in those days) of client money. Unlike Madoff, Whitney served only 3 years in Sing-Sing. Darvas holds the croupiers culpable for the “rigged game” that leads to the fleecing of the majority of its participants.

While Darvas recognizes many of the problems that plagued Wall Street a half century ago (and continue to the present day), his prescription is simply not helpful to investors, to put it as nicely as possible. Rather than playing a game they cannot win by trying to become superstar traders, most investors would do much better with the advice of John Bogle: Avoid the casino altogether by buying, holding, and rebalancing a risk-appropriate portfolio of index funds.