I'm starting a financial reading list. It's got a lot of books on it, so I have decided to read them in chronological order of publication. I figure I will get the most out of them if I follow along on how one was built on top of another. The first book is the oldest one that I could find referenced from multiple recommendations.
Where are the Customer's Yachts was published as a commentary on the financial industry in 1940. It was written by a guy working in finance during the roaring '20s, and who got out after the crash of '29. [The crash of '29 was precipitated by a large amount or margin buying and exacerbated by subsequent margin calls.]
I got the following major observations from the book:
- The financial industry is set up to make bankers and brokers rich, not consumers. This is mainly done through fees / commissions.
- Bankers like consumers to get rich, because then they are more likely to invest more and generate more fees.
- Consumers like to think that bankers and brokers can predict the future, though they cant. Bankers and brokers like to think that they can predict the future, as a way to justify to themselves the fees that they collect.
- Consumers who lose money by following the advice of bankers and brokers only have themselves to blame.
Basically, the main idea is that bankers and brokers are not the great advisers as they would have you believe, and consumers are foolish for thinking that they are. A rich broker is only rich because he is a good salesman, not because he can predict the future or make customers rich. The industry is set up to "extract rents" [note: this phrase does not appear in the book, I learned it when I was debating taking the CSC] from customers through fees, spreads, charges, commissions, ratios, etc.
There is more detail about particular financial people and practices, and why they are clearly not as great as they seem, but it's all filler around the major points.
The thesis of the book is contained in the title, and there is a story to explain it more:
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 naive visitor.
[preface]
I wasn't paying attention for great quotes, but these two towards the end of the book caught my attention:
The burnt customers certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools. Even Wall Street men themselves tend to encourage the idea. ... Faced with the huge losses "investors" have suffered, their egos subconsciously suggest to them that it is better to be regarded as a Machiavelli than as one who has spent his adult life engaged in mumbo-jumbo. [pg 196]
The specialist, as you know, is the man who keeps the "book" in a stock. On the left-hand page of his book he enters the buy orders that are placed with him, and on the right-hand page the sell orders. Whenever the orders of a buyer and a seller come together he executes the transaction and collects a commission for doing it. This part of his duties is quite all right, and perhaps a machine could be invented to do the same thing. [pg 200]
There was also a story about a "coin flipping contest" to describe how when enough people try to win at something, a fair number of them will succeed purely by chance. These expert coin flippers will start getting media attention due to their expertise at coin flipping, then they will start to publish publish books, newsletters, and tip-lines to offer advice on how to be an expert coin flipper. I didn't note the page that it is on, but there is a similar story online: Coin-Flipping & Graham-and-Doddsville.