Monday, August 18, 1997

The Fred Schwed Fribble
by Selena Maranjian

How did Foolishness begin? Does anyone really know? Scientists the world over have debated the origin of Foolishness. Some believe in the Fig Fang theory, which says that long ago, an entity with fangs bit into a magical fig and suddenly all was revealed to him or her. Others, like me, believe in a more evolutionary genesis. I like to imagine a time long, long ago, when nebulous, primordial flecks of Foolish thought floated around, occasionally bumping into a person who would suddenly be taken aback by a striking idea.

This must have happened to a man named Fred Schwed, Jr. (I didn't make the name up -- honest) back in the 1930s. For in 1940, he published a modest little book titled Where Are The Customers' Yachts? Now reprinted as an "Investment Classic," it will likely surprise you with its rather Foolish attitude and sense of humor. Even the title is Foolish, referring to a legend that has a visitor to Manhattan's financial district marveling at the wealth of the bankers and brokers, but wondering why their clients aren't all wealthy, as well.

Here, then are some excerpts from this remarkable book -- published a mere 11 years after the great stock market crash of 1929, six years after the creation of the Securities and Exchange Commission (SEC), in the middle of World War II, and a full 54 years before David and Tom Gardner launched the Fool online.

In his introduction, Mr. Schwed notes that, "My method of dealing with those subjects which I have never been able to understand will be to omit them, though this is not the customary method of writers on financial topics." How sad but true. Many financial journalists are not informed investors themselves, which is why they often quote opinions of the Wise on Wall Street.

Schwed goes on to explain how it isn't likely that anyone can really predict the movement of the market: "Mr. Roger Babson had predicted the [1929] crash for several years, which shows, among other things, that he had been very wrong for several years before he suddenly became very right."

Touche. The same goes for the many investing gooroos and prognosticators we see on TV and read about in the offline press.

He adds, "The proper activity of a customers' man is to keep his clients informed as to what is happening and what has happened. To these services he insists on adding, as I have complained already, his notions of what is going to happen. So do nearly all the others, and the property damage that results compares favorably, or dismally, with that caused by the Japanese beetle."

On page 41, Mr. Schwed takes a jab at technical analysis, quoting a clipping from the Wall Street Journal that he carries around with him:

"The action of the market was regarded as in the nature of a technical recovery, with little thought of the imminence of dynamic action. Resistance, as expected, was encountered just under 140; but after a one-day decline, volume dwindled and the market presently appears to be engaged in a somewhat hazy consolidation movement, and perhaps searching for dynamic forces which will encourage broad gauge buying and the resulting demolition of resistance barriers."

Whew! A mouthful indeed. And remarkably similar to the kind of stuff spouted by technicians on TV. (An interesting note is that the 140 refers to the Dow Jones Industrial Average, now well over 8,000, a fifty-seven-fold increase.)

Mr. Schwed proceeds to take on the likes of mutual funds, pointing out that although yes, diversification is good, "the average small investor... can get it for himself by buying five-share lots instead of hundred-share lots." He explains that although such funds are managed by professionals, "The subject of choosing profitable financial investments does not lend itself to competence. There is almost no visible supply."

He notes that vehicles like mutual funds "should be good and large, because this tends to make the expense of running it a negligible percentage of the whole." Very true. But Mr. Schwed is also astute enough to point out that when a fund is very large, "the investing problem becomes increasingly difficult. A fifty-thousand share position is a hard thing to buy and usually a harder one to sell." He's quite right, as modern mutual funds have demonstrated. The buying or selling of hundreds of thousands or millions of shares doesn't easily go unnoticed. Buying or selling a large amount in a short period of time is likely to drive the price up or down, thereby decreasing the gain or increasing the loss.

Fred Schwed, Jr. is a true proto-Fool. (Not a total Fool, mind you, as he hasn't yet hit upon concepts like buying and holding stocks for the long term.) I recommend this book highly to anyone interested in a breezy and funny 1940 perspective on investing, including discussion of shorting, margin, options and the newly-established SEC.

I close with Mr. Schwed's own words:

"The burnt customer certainly prefers to believe that he has been robbed rather than that he has been a fool on the advice of fools." Too bad the advent of Fools with capital "F"s was still two generations away. And even today, many Fools are still a bunch of years away from cruising on their own yachts. But with discipline and Dramamine, we'll get there.

[You'll find many other investing books on sale in our very own FoolMart. ]

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