Every bull market produces a small percentage of people that get rich quick. They pick that one stock that goes to the moon or hit a lucky streak that never seems to end. They’re celebrated. Stories are written as if to suggest, “If they can do, maybe you can do it too.” It feeds hope.
But their stories are rarely followed up on or when they are, never draw the same amount of attention. The encore falls short of the initial performance.
Fred Schwed Jr. once described this admiration. He’d seen it before with his father.
I have often heard people describe the financial shenanigans of Pop and other men like him. Inevitably they are lost in admiration for such derring-do. “A millionaire for a while!” they exclaim. “And then flat on the seat of his pants,” they continue with even more gusto. “And then the whole business all over again! And again. Wow!”
These admirers must feel that this method of handling one’s finances has something to recommend it. Perhaps they feel that this is living dangerously. (It is, at that; to appreciate just how dangerously you should be an intimate member of the hero’s family.)
Pop had the reputation of being a rich man during my teens and for a little time thereafter. He had certainly been busted enough on at least two former occasions to qualify for the odd hero worship I have described. I suppose people feel that there is something wonderful about a man who does not appear to bow before the ceaseless tyranny of prudence. Pop himself used to say (from Kipling again) when his way of life was questioned, “Thank God I can pay for my fancies.” This is a gallant battle cry. Only trouble is that all of a sudden you can’t pay for them, and you’ve already had them, and you owe for them.
The nature of Pop’s wealth was all but foreordained to be ephemeral. This was because of the sort of business he was in, speculative stock trading and promotion, a business which he had gotten into because of the sort of man he was — speculative. It was not that he constantly, or wantonly, gambled. He did nothing of the sort, for the great majority of the time. There were long periods, in a firm rising market, when he could have “liquidated his position” and deposited something like a million dollars in a good safe bank. The chief catch to this course of action was: what would he have done with himself next — taken up social work, or the collecting of ceramics?
The securities business, when indulged in judiciously, the way Pop mostly did, is a moderately profitable, moderately dull business. The same securities business when indulged in injudiciously, the way Pop occasionally did, is high and thrilling adventure. That is the reason why the business is sometimes engaged in injudiciously.
What made Pop’s money at all times risky is a subtle factor that some other Wall Street men besides Pop have failed to appreciate, or preferred not to appreciate. On each working morning Pop would arrive among the gleaming caverns of the Street — when things were good by taxi, when things were bad by subway, sometimes. At ten o’clock each and every morning, a bell rang loudly, and immediately Pop was presented with an opportunity to risk his entire fortune. This, of course, was something he never had any intention of doing, but the opportunity was implacably and ever there. In those happy days of rugged individualism it was perfectly possible for a broker with good credit, as Pop then had, to purchase in the course of an hour stock costing five times as much money as the man could really pay for. This is not the place for me to go into the technicalities of how this dubious miracle was performed; this is the place for me to wonder why in heaven’s sweet name it ever was performed; this is the place, the very wall, for wailing.
Since Pop used to go down there about a thousand times every three years, and since Pop was the sort of person he was, it is not too surprising that once in a long while something dreadful would happen. And of course as he got older it became increasingly difficult for him to get off the floor and fight some more. That simile about the floor is imperfect because he sometimes got knocked a hundred thousand dollars under the floor. One of the results of all this is that his sons, ever after, get galloping melancholia if they owe anyone five dollars for a week.
The most terrifying sentence in the English language is Thoreau’s — “Most men lead lives of quiet desperation.” Poor Pop, although he had a marvelous time of it at first, wound up leading a life of rather noisy desperation.
Was it a gift that fate bestowed on Pop, or a shabby trick that fate played on him? She gave him the gift of glamorous success when he was a young man, and then after a span of years took the gift back. This sequence of events is the most distressing sequence; yet there must be many, who never tumbled but who never first soared either, who envy him his mixed career.
Schwed’s father had a talent for teaching lessons to his sons but never learning them himself. He also had faithful creditors. Which was enough to get him back on his feet and in the game quicker than most. Until the creditors disappeared after one-to-many busts, leaving him to scrape together a bankroll like everyone else.
What he lacked was the ability to recognize enough. It’s one thing to play the game and win big. It’s another to be clear-sighted and disciplined enough to walk away. Of the small percentage of people in the same situation, only a handful recognize the position they’re in and say enough.
Most don’t. The thrill is too much of a draw. And chasing the thrill is why casinos stay in business.
Several lessons can be taken away from Schwed’s story, but the most important is that investing is a dull and boring business, most of the time. Market thrill seeking, in and of itself, is not necessarily bad. The idea of investing within “play accounts” exist for a reason. The problem lies in not setting limits for yourself, so losses won’t ruin you.
Playing risky games and dialing it up with leverage may, on rare occasions, work out but it’s not a strategy for the long run. Treating it so is a sure way to lose everything. To paraphrase Warren Buffett, taking huge risks with money you have and need for money you don’t need is foolish.
Source: The Pleasure Was All Mine
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