Novel Investor

Compounding investing wisdom...

The Lost Intro to Reminiscences of a Stock Operator

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Reminiscences of a Stock Operator originally began as a 12 article series for the Saturday Evening Post. Edwin Lefevre wrote the series over 12 months starting in 1922.

But when the first edition of the book was published, the first article was left out. The book begins with the eighth paragraph of the second article — “I went to work when I was a kid out of grammar school…”

At least, the version I read started that way (can’t speak for other editions). So I assumed that’s how the series started too. Until I dug it up and read it.

Lefevre sets the stage for the book in the first article. He starts with a great line: “The market was so weak that you could see customers counting their dead hopes.”

The narrator goes to visit an old friend at a brokerage firm. While there, stocks start crashing. The narrator overhears his friend blame it all on Livingston. He must be raiding the market.

But the narrator didn’t believe him, so he sets out to ask Livingston himself. An introduction is made. A meeting is set.

And the first of many conversations begin with a rant by Livingston, a lesson on the perils of trying to get rich quick and expecting a better return than the market will offer. Here’s how the conversation went: Continue Reading…

Different Forms of “This Time is Different”

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Howard Marks releases a new memo based on often used phrase “this time is different.” He highlights nine ideas, each a different form of those four words, that come up often today. His response to two ideas is worth highlighting.

The first is on the idea that we don’t have to have a recession.

When I hear people talk about the possibilities that the Fed will prevent a recession, I wonder whether it’s even desirable for it to have that goal. Per the above, are recessions really avoidable or merely postponable? And if the latter, is it better for them to occur naturally or be postponed unnaturally? Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus a return of moral hazard? And if the Fed wards off a series of little recessions, mightn’t that just mean that, when the ability to keep doing so reaches its limit, the one that finally arrives will be a douzy?

The push to minimize volatility in cycles — markets, business, economy — was the main theme that came out of the financial crisis. It’s not a new theme either. Except, what people really want, is what everyone wants — the upside without the downside that comes with it. It never works out that way, but it doesn’t stop people from trying again and again… Continue Reading…

The Common Traits in Every Bubble

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Euphoria and ruin are inherent in markets. There’s a long history to back it up, as John Kenneth Galbraith explains in A Short History of Financial Euphoria.

All it takes is an idea — it doesn’t have to be a good one — grounded in reality, along with rising prices to get the ball rolling. But if speculative euphoria takes hold, its because imagination runs wild with the possibilities brought by higher prices.

In the book, Galbraith relayed three common traits in every speculative episode:

  1. New Innovation: every episode is driven by something new and exciting that catches the public’s imagination. The stories around it are rich in imaginative possibilities but light on realistic ones. Financial innovations are just as enticing as technological ones. But financial innovations turn out to be less innovative as first thought.
  2. Debt: leverage against assets scaled to excess helps keep prices aloft.
  3. Crash: it always ends in collapse and ruin. The designers and promoters once labeled as geniuses are condemned. Investigations follow, scrutinizing the innovation, debating new rules and regulations, and placing blame, though not on the irrational speculation.

It also requires people. Financial memory loss and our ability to link money to intelligence keep the cycle alive. Continue Reading…

Longer Term Return Data Sources

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It’s never been easier for the average investor to find long term return data. The asset class tables I started several years ago, never would have been possible without it.

The benefit is the ability to turn a pile of numbers into a visually appealing tool — something people can learn from and, hopefully, make more informed investment decisions.

All the index data I use in the tables can be found online in some form. To get the returns still requires a little math. Since I’m doing the work for the tables anyways, I thought I’d publish it in case others might it useful.

Anyone who’s interested can find it on the new Historical Returns page. You can click the download buttons to grab a copy in CSV or Excel formats. Continue Reading…

Ten Hell’s of the Speculator

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Severn years before Edwin Lefevre began a series of articles that would become Reminiscences of a Stock Operator, he warned of the perils in speculation. He likened it to gambling on an unbeatable game.

His reason was no different than what’s been repeated millions of times since. Speculators are more likely to beat themselves before they ever beat the market.

What makes the game of stock speculation the most dangerous of all is the variety of pleasing disguises it is able to assume. Being born of greed, it feeds on greed, and thereby waxes greater. If that were all it did, of if it did this openly, it would not be so dangerous; but besides the additional lure of adventure there is the irresistible appeal to vanity, the challenge to pit your wits against other wits, and even against Nature and the vagaries of the weather and the weaknesses of men. It most often masquerades as a legitimate business operation, subject to and governed by the ordinary rules of ordinary business.

Greed, vanity, and ignorance make for a bad combination for speculators. It leads to all the familiar mistakes — chasing “easy money,” over trading, unable to quit while ahead — that inevitably lead to their downfall.

Lefevre warned readers about all of this in 1915, then relayed the 10 Hells: Continue Reading…

J.F. Hume: The Seedier Side of the Street

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Nobody paints a more accurate picture of old-time Wall Street than John Ferguson Hume. In the second, and final chapter, of The Art of Investing, Hume doesn’t hold back. He calls Wall Street by many names — a madhouse, a cuttlefish, a devilfish, a bloodsucker — while asking two questions:

Much graver questions grow out of its existence. Is it a harmless institution? Is it a public blessing? Is it a public curse?

The answers have always varied, depending on who you ask.

The market does have its uses but money always attracts nefarious types. Wall Street is infamous for it. And it will never entirely go away.

Scam artists and schemers will always be around in some form, trying to separate you from your money. That’s just the nature of things.

Then there’s the market itself. People are naturally drawn to it. The nature of people is to “invest” money in ways that run counter to success.

Hume attempts to inject some Street smarts, some timeless wisdom, and some history while painting a colorful picture of the seedier, speculative side of the Street. Continue Reading…

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