I got there eventually, after working briefly and very unhappily as a general dentist. Fortunately, when I finally started looking for a job in finance it was the mid eighties. The stock market was on fire and anybody in a pinstriped suit who had a pulse could get a job. I'd just finished an MBA because I thought I needed some economic credentials on top of the dental degree before fronting up to my first interviews. Turns out I'd wasted my time – Bankers Trust took me on regardless. I remember my future boss, Bruce Lugton, telling me at the interview: ‘You should have come and seen us a couple of years ago. You didn't need the MBA.' He was right. A few weeks later I was in the dealing room in Sydney and the FX trader behind me had just tossed in a job delivering pizzas.
I was green to the game and needed to establish some credibility. Talking about teeth just didn't cut it on a money market dealing desk. So I learned the jargon. The Reserve Bank wasn't putting up interest rates, it was ‘tightening monetary policy'. You weren't about to sell, you were ‘going short'. And you weren't taking advantage of the other guy, you were making a ‘good spread'.
I had trouble with the whole economics thing. It wasn't like science. Science is pretty much black and white, and I'm a black-and-white sort of guy. But that brand of thinking doesn't work with economics. While everyone around me reeled off economic commentaries like they were one job application away from becoming Chairman of the Federal Reserve, I was still trying to work out why the Reserve Bank would raise interest rates if a flood in Queensland had caused the price of bananas to go up.
For those who learned to play the game, a good economic spiel came in very handy. Econospeak goes something like this: First come up with a few terms like ‘fiscal deficit', ‘monetary policy' and ‘quantitative easing'. Next wrap a good story around them. And finally tell it like you're dead certain you're correct. It doesn't matter if you throw in a few predictions, because no-one will ever check whether they come true or not. People will just remember you as that smart guy who had all the answers.
But enough about financial economics – there's plenty more of that later in the book. I want to introduce the reason for writing this book. To me the financial markets present the most fascinating environment I've ever interacted with. Thought-provoking, stimulating, yet an environment most people approach in an entirely illogical way. This book seeks to question commonly held beliefs about the financial markets by putting them through a sieve of logic. And in the process I hope it helps you develop a set of investment principles that works well for you.
One thing you'll notice as you read this book is that there are lots of quotes. And for that I make no apology. Quotes are great. They're an efficient use of words, distilling great ideas into pithy messages. But I know not everyone shares my enthusiasm. When I was writing this chapter I spotted a newspaper article in which the writer was condemning the use of quotes. He said their use stemmed from a lack of original thought … and then he used a quote to strengthen his case.
I particularly love old quotes. The older the better. The fascination for me is that they show how investment principles transcend time. Century-old investment books contain exactly the same stuff as books written today – that's right, the very same principles modern writers want you to believe they thought up all by themselves. Old quotes about investing also show that investors in the past held the same fears, hopes and dreams that investors hold today. So I hope you share my passion for quotes and financial history, because you're going to get a decent dose of both in this book.
Also this is not a ‘how to' investment book. The world is full of them, and in the wrong hands they are extremely dangerous. Successful people don't blindly accept everything they hear; they work things out for themselves. So if you want to be a great investor, leave the recipe books in the kitchen. As Johann Goethe wrote in Maxims and Reflections, ‘There is nothing so terrible as activity without insight.'
So steer clear of books with titles like ‘A Sure-fire System to Beat the Managed Funds by 15 %' or ‘How to Trade Like a Pro'. Successful investing just isn't that easy.
I want to spread some good news early on. Solid returns are there to be had if you develop a basic knowledge of how the stock market works, and mix it with a good dose of common sense. For example, simply leaving your money in an index fund and letting it compound over time will serve you well. Average stock market returns can be great returns. Problem is, people don't like ‘average', and they don't realise that it takes work to become ‘above average'. The famous stock trader Jesse Livermore once put it this way:
Over a long period of years I have rarely attended a dinner party including strangers, that someone did not sit down beside me and after the usual pleasantries inquire: ‘How can I make some money in the market?'
It is difficult to exercise patience with such people. In the first place, the inquiry is not a compliment to the man who has made a study of investment and speculation. It would be as fair for the layman to ask an attorney or a surgeon: ‘How can I make some quick money in law or surgery?'1
To beat the market you need a deep understanding of everything that investing can throw at you. That understanding is hard earned. I haven't met a good investor who wasn't driven by the need to learn and to keep learning.
Now there's an irony to all of this: the more you learn about investing, the more you appreciate how simple the process needs to be. I'm not saying that financial markets are simple, or that, given enough time and education, one day you'll find them simple, or that you can treat the process casually and win. Quite the opposite on all three counts. I'm saying that as your appreciation of financial markets develops it will become clear that they are too complex to be completely understood. So our only hope is to interact with them in a simple way. This was a truth understood by Charles Dow, the founder and first editor of The Wall Street Journal and a great investment thinker. He summed up how experienced Wall Street operators felt in his editorial of 20 November 1901: ‘The more they actually know, the less confident they become.'
But until you appreciate the complexity, until you get your mind around the complications, intricacies and difficulties the market can throw at you, you won't have the capacity to undertake this simplification. In Goethe's words, you would be acting ‘without insight'.
Despite the complexity and contradictions of financial markets, there's no shortage of people who claim to see order where there is none. You see them every night on TV offering concise explanations for the inexplicable. This does no more than perpetuate the myth that financial markets can be easily understood and described.
The aim of this book is to get you thinking. To become a serious investor you need to question and doubt; to challenge every word delivered by articulate men in pinstriped suits; to appreciate where the limits of reason lie. Then you'll be better placed to make your own investment calls.
Investment great Warren Buffett has stated that he sees little point in writing a book on investing, that everything one needs to know has already been written. There's truth in what he says. But it's also important how those insights are arranged. And I hope the words in this book are arranged in a way that both captures your interest and focuses your thinking.
Most words eventually fall from the public eye. The books that contain them either are destroyed or remain unread for years, gathering dust on bookshelves. Before this book becomes another collector of dust or lost digital imprint, I hope it leads someone, somewhere, to make better investment decisions.
As a postscript, I should add that I've pitched this book to readers who already have some knowledge of how the financial markets operate. But if you're still relatively early on that journey, you might find the glossary of financial terms at the back of the book helpful.
Now on to chapter 1!
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